San Francisco Federal Reserve President Mary Daly stated on Friday that she believes further interest rate cuts may be necessary to address weakness in the labor market, as workers face financial pressures from rising prices eroding wages and new job opportunities remain scarce.

In an interview, Daly remarked, "I think we have to be open-minded on rates, very open-minded," marking her first public comments since the Fed's policy committee voted 10-2 last week to hold the benchmark rate steady in the 3.50%-3.75% range. She expressed support for that decision but added, "frankly, I think there is a case to be made for further rate cuts." Daly noted that to justify cutting rates, policymakers "have to be very confident, like really confident, that tariff effects are going to fade and that inflation is really on a downward trajectory."

The Fed's preferred inflation measure hovered around 3% last year, significantly above the central bank's 2% target. However, many analysts, including some at the Fed, anticipate goods inflation will subside by mid-year, with overall inflation returning to more accommodative levels.

Daly emphasized that cutting rates also requires genuine concern that "labor market challenges are greater than what we currently see in the data." The U.S. unemployment rate stood at 4.4% in December. Economists surveyed by Reuters expect the rate to remain unchanged when the Labor Department releases January data next week.

While risks between price stability and maximum employment—the Fed's dual congressional mandates—appear "relatively balanced," Daly sees greater vulnerability on the labor market side. She warned that if businesses do not see anticipated demand materialize, a "sluggish" job market could quickly turn into an environment with "some layoffs." However, given well-anchored inflation expectations, she views a significant inflation surge as unlikely.

Daly expressed greater concern about the labor market than inflation. She also highlighted a key leading indicator: feedback from numerous parents about their children's difficulties finding jobs, corroborated by recent data showing higher unemployment rates for recent college graduates compared to the general workforce.

"This speaks to the precariousness of the job market," she said. "At this point, given what I see in the economy, I'm inclined, you know, to cut rates further: whether it's one or two is hard to say." Daly does not hold a vote on the Fed's rate-setting committee this year but participates in regular policy meetings.