MNI: Fed's Daly Highlights Risk Of Rising Jobless Rate

The Federal Reserve faces a risk of rising unemployment, in addition to sticky inflation, and it would be appropriate to lower the policy rate if the labor market weakens more than expected, San Francisco Fed President Mary Daly said Monday.

Although job growth remains strong, most other measures of labor market conditions have returned to their pre-pandemic levels, Daly said in remarks prepared for the Commonwealth Club World Affairs of California.

"The balance between the demand and supply of workers has largely normalized," she said. Firms have been posting fewer jobs as interest rates rose and demand cooled, rather than lay off workers, but that could change in the near future, she said.

The April job market data shows the economy is approaching a "flatter" portion of the Beveridge curve, the historic relationship between job vacancy and unemployment rates. "This means that future labor market slowing could translate into higher unemployment, as firms need to adjust not just vacancies but actual jobs."

NOT FROTHY

Daly said policy would respond differently to different scenarios.

"If inflation turns out to fall more slowly than projected, then holding the federal funds rate higher for longer would be appropriate," she said. (See: MNI INTERVIEW: Fed Might Not Cut Rates Until 2025-Swanson)

"If instead, inflation falls rapidly, or the labor market softens more than expected, then lowering the policy rate would be necessary. Finally, if we continue to see gradual declines in inflation and a slow rebalancing in the labor market, then we can normalize policy over time, as many expect."

Cooling demand has been the key driver of falling inflation since the second half of last year, she said, showing monetary policy is working.

"At this point, we have a good labor market, but not a frothy one. Going forward, this tradeoff may not be as favorable."