Fed’s Daly: Policy must avoid trading one mistake for another

San Francisco Fed President Mary Daly said the FOMC has appropriately reduced policy rates by a total of 50bps this year as part of a “prudent risk management approach”, noting that the adjustments provide “needed insurance” for the labor market while keeping policy “modestly restrictive” to further curb inflation.

In an essay published today, Daly posed the central question now facing the Fed: Will more rate cuts be needed? She argued that while policymakers must remain alert to inflation risks—drawing lessons from the 1970s and the post-pandemic surge—they must also avoid overcorrecting and stifling growth.

“We don’t want to work so hard to not be the 1970s that we cut off the possibility of the 1990s,” she wrote, warning that an excessive focus on inflation history could trade one mistake for another.

Daly emphasized that getting policy right will require “an open mind” and careful evaluation of evidence on both sides of the debate.

Full essay of Fed’s Daly here.