The San Francisco Fed president's case for more rate cuts

• Daly makes the case that getting rates closer to a level where they're doing less to slow growth is the most sensible course, given risks of continued weakening in the job market.

What they're saying: "For me, relaxing the policy rate to make sure it continues to be modestly restrictive — but not so restrictive that it unnecessarily disrupts the labor market — would be the path of policy," Daly, a trained labor economist, tells Axios.

• "We have enough room to do some cuts and still have a modestly restrictive interest rates."

The big picture: "It's not that we've already fallen off a cliff," Daly says, referring to the health of the labor market, where hiring has slowed to a crawl but the unemployment rate has held at a historically low level.

• "I don't want to hit the point where there would be a precipitous increase in unemployment."

What to watch: Daly points to the potential downside risk to the labor market as suggested by the Beveridge Curve, which captures the relationship between vacancies and unemployment.

• She says the curve suggests the economy might be at a tipping point where an increase in joblessness might soon follow.

Between the lines: It makes for an unusual economic backdrop, with solid growth that might not typically warrant rate cuts alongside weak employment that typically does.

• But Daly says that the Fed's mandate is very clear: "price stability and full employment — growth isn't in there."
• "Think of the jobless recoveries we had: As long as inflation wasn't rising, monetary policy was accommodative and supportive of continued growth in the labor market," she notes.
• "We weren't saying, 'Oh, growth is good, so we're fine.'"

The intrigue: Until September, the Fed had been reluctant to cut interest rates as it waited out uncertainty about tariff policy that risked reigniting inflation.

• "If you look at underlying inflation — especially if you think the tariffs are a one-time event and it takes time for the effects to come through — then you would not want to hold on so tight that you injure the labor market," Daly says.
• "You don't gain much for that."

So what about inflation? Daly says it looks like tariff-related price increases won't result in a prolonged inflation uptick, which helps support the case for further rate cuts.

• "I'm more optimistic that this is a one-off, and that we can support the labor market and still bring inflation down to 2% over time," Daly says.

Zoom in: She, and most Fed policymakers, appear more sanguine about the risk of ongoing inflation than they were when large-scale tariffs were first announced in the spring. She mentions three factors that support that position:

• Magnitude: "The effective tariff rate is higher than we had before, but it's not totally being passed on to the customer."
• Scope of tariffs: "The breadth of potential products subject to tariffs has been scoped down because of the tariff negotiations."
• Containment: "If a goods price goes up, do service providers say, 'I'm going to do opportunistic price increases'? We just haven't seen that — and my guess is that's really because the economy is slower."

Flashback: Daly acknowledges the caution around calling an inflationary risk "temporary" — an incorrect position the Fed took before the 2022 inflationary shock in 2022.

• "You don't want to make a different mistake because you're so afraid of making this the first mistake," she says.
• "The second mistake is we are afraid that inflation is just around the corner, and we just wait for it to occur, and in the meantime, the labor market softens."