Dovish voices favoring monetary easing inside the Federal Reserve are gaining strength again. Mary Daly, president of the Federal Reserve Bank of San Francisco and widely seen as a close confidant of Chair Jerome Powell, has publicly urged a benchmark rate cut in December. It appears she believes preventing a sudden collapse of the labor market is more urgent than the risk of reigniting inflation.
The Wall Street Journal (WSJ) reported on the 24th that Daly said in an interview, "I support cutting rates at the December meeting." Daly does not have a vote this year, but she is a representative centrist who has moved in lockstep with Powell on currency policy. Her public support for a cut is evidence that the current jobs market is that precarious.
Daly voiced concern about a "nonlinear" shift in the labor market. In economics, a nonlinear change refers to a phenomenon that deteriorates gradually but collapses rapidly like falling off a cliff once a threshold is crossed. "The labor market is fragile enough now that it is exposed to the risk of a sudden deterioration," she said, adding, "It is hard to be confident that the Fed can move ahead of the pace of change in the labor market."
The U.S. job market is currently in a "low-hiring, low-firing" equilibrium. But Daly saw a high likelihood that this balance will break in a negative direction. She warned, "If corporations start reducing hiring due to lower output, the situation could spiral out of control."
By contrast, fear of inflation appears relatively tempered. There are worries that tariff policies under the Donald Trump administration will fuel prices, but Daly said, "The expense pressure from tariffs is not as large as initially expected," playing down the risk of a sharp inflation spike. The logic is that efforts to tame prices should not inadvertently cost people their jobs.
A shift in the Fed's internal mood is also being detected. As recently as early this month, keeping rates unchanged in December was the prevailing view. But on the 21st, John Williams, the New York Fed president and Powell's closest aide, said there is "room to cut rates in the near future," reversing the tone. Williams also emphasized, "Avoiding unnecessary risks to the labor market is as important as achieving the inflation target."
The Fed's internal calculus remains complex. Opinions among policymakers over the December decision are evenly split. Most, including Governor Michelle Bowman and presidents Susan Collins (Boston) and Austan Goolsbee (Chicago), still favor holding rates (pause) or are taking a cautious stance. They worry that cutting too quickly would leave them without tools if the economy overheats again next year.
Daly countered that "even if we have to raise rates again next year, we should not hesitate to cut now." She said, "We must not let uncertainty about the future tie our hands and keep us from taking necessary actions now."
On the unusual discord within the Fed, Daly said, "This is not dysfunction but a natural reflection of uncertainty," adding, "If everyone agreed, that would actually be groupthink." Ultimately, at the Dec. 9-10 FOMC meeting, the key will be what kind of referee role Powell plays in this tight tug-of-war.