A 50-basis point interest rate cut next month could potentially send the wrong signal to markets about the state of the U.S. labor market, San Francisco Federal Reserve President Mary Daly told the Wall Street Journal.

A soft July jobs report, as well as muted inflation data for the month, have fueled increased expectations that the Fed will slash borrowing costs at its September meeting. It would be the first drawdown by the central bank since it paused its policy easing cycle last December.

Investors are now all but pricing in a 25-basis point reduction after the Fed's September 16-17 gathering, with Investing.com's Fed Rate Monitor Tool now seeing the probability of such a move at over 99%. Treasury Secretary Scott Bessent, however, has called for an even deeper half-point cut due partially to sharp downward revisions in job growth in June and May.

But, in an interview with the WSJ, Daly said she is worried that a fifty-point lowering "would send off an urgency signal that I don't feel about the strength of the labor market."

"I just don't see that. I don't see the need to catch up," Daly added in her comments to the paper.

But Daly flagged that government indicators suggest that while the labor market is "not bad right now," it is harder to ignore that the "direction of change is going the wrong way."

Last month, Daly was part of a majority of Fed rate setters who backed leaving rates unchanged at their current level of 4.25% to 4.5%, but has since said she would support a September cut, partly citing inflationary pressures that have been more tepid than many observers had initially feared.

Economists have widely predicted that President Donald Trump's tariffs will drive prices higher, although the impact of the levies has so far been tame. Still, concerns remain that the full effect of the duties will be felt in the coming months.

Against this backdrop, Daly told the WSJ that her previous prediction for two rate cuts this year remains reasonable, but said three reductions in 2025 could be appropriate if more signs emerged that the labor market was in a increasingly "precarious" state. Conversely, fewer cuts may be needed should inflation begin to heat up once again, Daly said.

Monetary policy is also likely to be "too restrictive" for the current trajectory of the economy, and may constitute a "recalibration," Daly said. She favored a gradual move to a more neutral policy stance over the "next year or so."

Source: Investing.com