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

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Mary Daly, President of the San Francisco Fed, stated in her latest blog post that the US economy might be experiencing a decline in demand, but tariff-related inflation currently appears to be under control. She stressed that the Federal Reserve should discuss, with an "open mind," whether to continue cutting rates on top of the 50 basis points cut already made this year.

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

Daly does not currently hold a voting right at the Federal Open Market Committee (FOMC). She emphasized that "making the right policy requires an open mind and deeply investigating the evidence from both sides of the debate."

Daly did not express a specific view on whether to continue lowering rates in December. An earlier article from Wallstreetcn mentioned that Bank of America believes Jerome Powell's cautious remarks after the October rate cut mean that the threshold for a December rate cut has been raised; data is needed to "prove" its rationale, not just "refute" its necessity.

Limited Scope of Tariff-Driven Inflation

In her analysis, Daly paid special attention to the extent of the impact of tariffs on inflation. She said, "So far, the effects of tariffs are mainly confined to goods, and have rarely spread to service sector inflation or inflation expectations, which remain relatively well anchored near our target."

This assessment provides theoretical support for the Fed to continue its accommodative policy. Against the backdrop of rising trade policy uncertainty, Daly's remarks suggest that the Fed considers the overall inflation threat from tariffs to be relatively controllable.

Dual Warnings from Historical Experience

Daly introduced an important historical comparison framework in her article, contrasting the current situation with the 1970s and 1990s. The 1970s were marked by entrenched inflation, while the 1990s featured productivity growth and the Fed adopted a balanced policy approach.

"We cannot ignore the lessons of the 1970s or the post-pandemic inflation surge, but we also cannot ignore other parts of history," Daly said. "We do not want to stifle the possibilities of the 1990s to avoid repeating the mistakes of the 1970s, and thereby end up with job losses and slower economic growth. To do so would be to trade one mistake for another."

According to the Fed's regional reserve bank president rotation system in the FOMC, this president of the San Francisco Fed will become an alternate voting member in January next year and a formal FOMC member in 2027. This means that while her policy opinions do not currently directly affect the voting outcome, they will play a larger role in the future.

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