Federal Reserve Board Warns: Labor Market Risks Are Approaching an Inflection Point!

San Francisco Federal Reserve Chairman Daly warned that the US labor market is nearing an inflection point, and a further slowdown could mean a rise in the unemployment rate.

Daly, who has the right to vote on monetary policy this year, said that in order for the inflation rate to return to the Fed's 2% target, it may be necessary to curb demand. This may put pressure on the labor market, which, although good, is no longer “bubbling”.

In a speech delivered Monday at the San Francisco California Commonwealth World Affairs Club, Daly said: “So far, labor market adjustments have been slow, and the unemployment rate has only risen slightly. But we're getting close to a point where the probability of a positive outcome may be reduced. A future slowdown in the labor market may translate into a rise in unemployment, as companies need to adjust not only job vacancies, but also actual jobs. At this point, inflation isn't the only risk we face. ”

The San Francisco Federal Reserve Chairman also said that the turbulence in this year's inflation data has not stimulated people's confidence. Although recent data shows a decline in price growth, which is quite encouraging, Daly said it is still difficult to know whether the economy is actually on the path of price stability.

Daly urged policymakers to be alert and open to all kinds of situations that may occur in the economy. “Policies must be conditional; that is appropriate,” she said.

For example, if inflation falls more slowly than expected, Daly believes interest rates should be kept higher for a longer period of time. If inflation falls rapidly or the labor market cools more than expected, it will be necessary to cut interest rates.

Daly said employers in her city (San Francisco) should bring remote workers back to the office to help revitalize the local economy. “Unless we change the city, this city won't change,” she said.

According to data compiled by CBRE (CBRE), San Francisco's office vacancy rate is over 36%, the highest among large metropolitan areas in the US. However, Daly emphasized that the San Francisco Bay Area's status as a major technology center — where giants such as Nvidia, Apple, Alphabet, and Meta Platforms are headquartered, should help promote the region's development and break the claim that San Francisco has fallen into a so-called cycle of bad luck.

In the first week of June, the average weekly office attendance rate in the San Francisco metropolitan area was 44% of pre-COVID-19, according to data from security company Kastle Systems. Of the 10 major regions the company tracks, only San Jose, the nearby location of Silicon Valley, has a low attendance rate of only 40%. Before the COVID-19 pandemic, nearly 470,000 people commuted from outside the city to San Francisco every day, according to the San Francisco Office of Economy, Labor, and Development.

Prior to her speech, several Federal Reserve officials also expressed opinions last week, stressing the need for more evidence of cooling inflation before cutting interest rates. Policy makers have kept interest rates at 20-year high levels for nearly a year, and they don't seem to be in a hurry to cut interest rates.

Earlier this month, according to the median forecast, Fed officials expected to cut interest rates only once in 2024, lower than the three times forecast in March.