Exclusive-Fed's Daly sees labor market vulnerabilities, room to cut interest rates

By Ann Saphir Feb 6 (Reuters) – San Francisco Federal Reserve President Mary Daly on Friday said she thinks one or two more interest rate cuts may be needed to counteract weakness in the labor market, where workers are "walking a knife's edge" with higher prices eating into their wages and scarce opportunities for new jobs. "I think we have to keep an open mind, a very open mind" on rates, Daly told Reuters in an interview, her first since the U.S. central bank's policy committee voted 10-2 last week to leave its benchmark interest rate steady in the 3.50%-3.75% range. "I was supportive of that decision, but frankly, I thought you could make a case for going ahead and taking a little more off," she said. To cut rates, Daly added, "you have to be pretty confident, like really confident, that the effects of the tariffs will roll off … that inflation is really on a downward trajectory." Inflation, as measured by the Fed's preferred gauge, was stuck around 3% last year, well above the central bank's 2% target. Many analysts, including some at the Fed, however, project goods inflation will have run its course by the middle of this year and overall inflation will resume easing. To cut rates, you also "have to be really worried that the labor market is more challenged than we currently see in the data," Daly said. The U.S. unemployment rate was 4.4% in December. Economists polled by Reuters expect it will be unchanged for January when the Labor Department publishes the latest data next week. While the risks to price stability versus maximum employment – the Fed's two congressionally mandated goals – look "relatively balanced," Daly said, the vulnerabilities, as she sees them, are tilted toward the labor market side. A "low-firing" labor market can quickly turn to a "some-firing" environment if businesses don't see expected demand panning out, she said, but given anchored inflation expectations, there's little that makes her feel an inflation spike is in the offing. "I'm a little more worried about the labor market than I am about inflation," she said. Daly also is focusing on another key leading job market indicator: the sheer number of parents who tell her about their kids' difficulties finding jobs, a phenomenon also evident in recent data showing a higher unemployment rate among new college graduates than among workers more generally. "That's an indicator about just the precariousness" of the job market, she said. "At this point, given what I'm seeing in the economy, I lean towards, you know, additional cuts: whether that's one or two is hard to say." Daly does not have a vote on the Fed's rate-setting committee this year, but takes part in its regular policy-setting meetings. (Reporting by Ann Saphir; Editing by Paul Simao)

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