Fed's Daly says slowing job growth due to weaker worker demand

San Francisco Fed President Mary Daly asserted that the deceleration in U.S. payroll growth stems from weaker labor demand, not reduced labor supply due to immigration, citing slowing wage growth and declining job creation as evidence. Her analysis, which also downplays broad inflationary impacts from tariffs, suggests a critical juncture for Federal Reserve policy, requiring an assessment of whether the economy faces ongoing inflation risks or is poised for an AI-driven productivity surge that could support growth without price pressures.

Analysis

San Francisco Fed President Mary Daly attributes the slowing U.S. payroll growth to weaker labor demand, not reduced labor supply from immigration, citing a decline in monthly job creation from 150,000 in 2024 to 50,000 in H1 2025. This demand-side weakness is further supported by slowing nominal and real wage growth, even in sectors with higher concentrations of foreign-born workers, indicating a cyclical rather than structural labor market cooling.

Daly's analysis is significant for Federal Reserve policy, as monetary policy changes primarily influence worker demand. She noted the Fed has already cut borrowing costs by 0.25 percentage points in its last two meetings. Additionally, Daly indicated that tariff impacts on prices have been largely confined to goods, without generating broad-based or persistent inflation dynamics.

The central banker emphasized the Fed's need to assess whether the U.S. faces ongoing inflation risks requiring tight policy or is poised for an AI-driven productivity boom that could support growth without price increases. This critical evaluation necessitates an "open mind and digging for evidence" to guide future monetary policy decisions.

Key Decisions for Investors

• Monitor Federal Reserve communications for further indications on how labor market data, particularly demand-side indicators, influence future interest rate decisions, as Daly's view suggests less structural inflationary pressure.
• Analyze corporate earnings calls and economic reports for evidence of slowing wage growth and its impact on profit margins, especially in labor-intensive sectors, given the observed deceleration in both nominal and real wages.
• Assess the potential for an AI-driven productivity boom to materialize, as this could provide a non-inflationary growth pathway, influencing investment strategies in technology and related sectors.