Will there be a rate cut in December? Federal Reserve's Daly: The impact of tariffs is limited, and we should embrace with an "open mind."

Mary Daly, President of the San Francisco Federal Reserve, stated in her latest blog post that the U.S. economy may be experiencing a decline in demand, but tariff-related inflation currently appears to be under control. She emphasized that the Federal Reserve should discuss whether to continue cutting interest rates, having already lowered them by 50 basis points this year, with an "open mind."

In the article published on Monday, Daly analyzed the current economic situation, believing that the slowdown in wage growth points to a "negative demand shock." She noted that although price growth remains high, the overall inflation level is manageable, and import tariffs have not broadly pushed up price levels.

Daly currently does not have voting rights on the Federal Open Market Committee (FOMC), and she stressed that "making the right policy requires an open mind and a deep dive into the evidence from both sides of the debate."

Regarding whether to continue cutting rates in December, Daly did not express a specific viewpoint. An earlier article from Wall Street Journal mentioned that Bank of America believes that Powell's cautious remarks after the October rate cut mean that the threshold for initiating a rate cut in December has been raised, requiring data to "prove" its rationale rather than "refute" its necessity.

Limited Impact of Tariff Inflation

Daly particularly focused on the extent of tariffs' impact on inflation in her analysis. She stated, "So far, the impact of tariffs has been mainly confined to the goods sector, with little spillover into service sector inflation or inflation expectations, which remain relatively well anchored near our target."

This judgment provides theoretical support for the Federal Reserve to continue its accommodative policy. In the context of increasing uncertainty in trade policy, Daly's remarks indicate that the Federal Reserve believes the threat of tariffs to overall inflation is relatively manageable.

Dual Warnings from Historical Experience

Daly presented an important historical comparison framework in her article, drawing parallels between the current situation and the 1970s and 1990s. The 1970s marked an era of entrenched inflation, while the 1990s were characterized by productivity gains, with the Federal Reserve adopting a balanced policy approach.

"We cannot ignore the lessons of the 1970s or the inflation surge after the pandemic, but we also cannot overlook other parts of history," Daly stated. "We do not want to stifle the possibilities of the 1990s in an effort to avoid repeating the mistakes of the 1970s, ultimately leading to job losses and economic slowdown. Doing so would be akin to exchanging one mistake for another."

According to the rotation system of Federal Reserve district bank presidents on the FOMC, the San Francisco Fed President will become an alternate voting member in January next year and will become a formal member of the committee in 2027. This means that while her policy views cannot directly influence voting outcomes at present, they will play a larger role in the future