San Francisco Fed President Mary Daly has signaled a clear message amidst economic uncertainty: it's time to be patient.
Her 'steady in the boat' approach is a direct response to the latest, and quite surprising, February jobs report. The economy lost 92,000 jobs, a stark contrast to expectations. But Daly advises against jumping to conclusions. First, the report had some unique distortions. A major healthcare strike at Kaiser Permanente temporarily removed over 30,000 workers from the payroll count, and severe winter storms also muddied the waters. So, while the headline number looks alarming, it might not signal a broad economic collapse.
Second, the inflation picture is anything but clear. While some indicators like the January CPI report suggest inflation is cooling, others are flashing warning signs. The Producer Price Index (PPI), which can predict future consumer prices, recently came in hotter than expected. More importantly, a recent spike in oil prices due to geopolitical tensions could push headline inflation back up. With the Fed's preferred inflation gauge, the PCE index, still above the 2% target as of December, there's a real risk of acting too soon.
Finally, the overall labor market is sending mixed signals. While the headline job loss is a concern and hiring momentum has fallen below the 'breakeven' level needed to keep unemployment steady, other data points tell a different story. For instance, initial jobless claims—the number of people filing for unemployment for the first time—remain very low. This suggests that companies aren't resorting to mass layoffs. This 'low-hire, low-fire' environment supports Daly’s view that the labor market is vulnerable but not in a freefall.
Taken together, these factors create a compelling case for waiting. The Fed has already eased policy with rate cuts in 2025. Now, with a weak but distorted jobs number, conflicting inflation data, and a key inflation report not due until next week, the most prudent path is to hold steady at the upcoming March meeting. It's a classic data-dependent stance: don't make a move until the picture becomes clearer.
- Glossary
- FOMC (Federal Open Market Committee): The twelve-member committee within the Federal Reserve that sets U.S. monetary policy, including interest rates.
- PCE Price Index: The Personal Consumption Expenditures price index is the Fed's preferred measure of inflation, as it captures a broad range of household spending.
- Breakeven Payrolls: The estimated number of new jobs the economy needs to create each month to keep the unemployment rate stable, accounting for population growth.