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Daly Says Low U.S. Inflation Means Fed Can Draw More Job Gains

Matthew Brockett and Matthew Boesler

(Bloomberg) -- Low inflation means the U.S. central bank can let a hotter economy draw more people into the labor force, said Federal Reserve Bank of San Francisco President Mary Daly.

“Right now, with little inflationary pressure and considerable uncertainty about the threshold for full employment, I’m biased towards including as many workers as possible in the expansion," Daly said in remarks prepared for a speech in Wellington, New Zealand on Thursday.

Daly’s comments hint that she’s not concerned about keeping interest rates low despite U.S. unemployment being near a 50-year low, a situation which policy makers traditionally have expected would lead to rising inflation.

The San Francisco Fed chief and her colleagues at the U.S. central bank cut interest rates in July for the first time since the financial crisis in 2008, citing a slowdown in global economic growth, uncertainty related to ongoing trade conflicts and low inflation.

Fed Chair Jerome Powell signaled in an Aug. 23 speech that there may be more easing ahead, citing an “eventful” three weeks since the July decision in which risks to the outlook rose.

Fed officials next meet Sept. 17-18 to decide on policy, and investors have penciled in another rate cut, according to the prices of futures contracts tied to the benchmark federal funds rate.

Inflation Target

President Donald Trump’s announcement after Powell’s Aug. 23 speech of new tariffs on goods imported from China, alongside a tweet attacking Powell personally for keeping rates too high, added to pressure on the Fed to ease further.

Daly didn’t comment on trade in her prepared remarks but highlighted concerns about inflation, which many Fed officials currently see as too low. The Fed’s preferred measure was 1.4% in June, and has undershot the central bank’s 2% target throughout most of the last seven years.

“There are a number of difficulties that could arise with persistent misses on our 2% goal,” Daly said. “If we consistently fall short of our inflation target, expectations will drift down. We’re already seeing signs of softness in survey- and market-based measures of longer-run inflation expectations.”

To contact the reporters on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net;Matthew Boesler in New York at mboesler1@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull

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