US Fed Officials: Interest Rates May Stay High Longer, but Rate Cuts Still Possible This Year

On Friday, April 18, local time, San Francisco Fed President Mary Daly stated that due to rising inflation risks, the US Fed may maintain the current interest rate level longer than expected, but an interest rate cut is still possible this year.

"Compared to a year ago, the risks of inflation are higher now, so we may need to maintain a tight policy for a longer period than originally anticipated," Daly said at an event at the University of California, Berkeley on Friday. "But this does not mean it will remain tight forever, as inflation will eventually pull back."

Since December last year, the US Fed has kept the target range for the federal funds rate at 4.25% to 4.50%. In the Summary of Economic Projections (SEP) released last month, the Fed maintained its forecast of two interest rate cuts this year.

Daly stated that she remains "comfortable" with the median forecast in the March SEP, which suggested "two interest rate cuts this year, each by 25 basis points."

"If inflation does eventually decline, we must gradually cut interest rates, similar to the approach mentioned in the SEP, to ensure we do not over-tighten the economy," she said.

However, Daly also emphasized that there is no need to rush at the moment.

"I can imagine that we will adjust the policy rate at some point in the future, but we do not need to make a hasty decision," she said. "We still have plenty of time, and we are in a good position to wait and see."

Regarding the future direction of the US Fed's interest rates, the aggressive trade policies of US President Donald Trump are the biggest uncertainty. Most economists expect that Trump's tariff policies will suppress economic growth and push up inflation in the short term.

Fed Chairman Jerome Powell and several officials this week stated that the Fed's focus is to ensure that price increases caused by tariffs do not evolve into persistent inflation.

In contrast, Daly appeared more optimistic about the impact of tariffs.

"Our current economic conditions are robust, and monetary policy remains tight, continuing to exert downward pressure on inflation," she said.

Daly added that the businesses she has been in contact with are avoiding taking on more risks but are also not significantly cutting investment plans or laying off employees.

Daly also stated that she estimates the US "neutral interest rate," adjusted for inflation, to be around 1%. The neutral interest rate is the level that neither stimulates nor suppresses economic growth.