Fed's Daly Sees Inflation Slowing, Warns of Uncertainties
San Francisco Fed President Mary Daly expects inflation to slow but warns the economic outlook remains uncertain, signaling a cautious stance on rate policy.
Federal Reserve Bank of San Francisco President Mary Daly said inflation should begin to slow, but cautioned that the economic outlook remains clouded by uncertainties. Speaking at a Bank of Spain event in Santander, Spain, Daly reiterated the central bank's data-dependent approach, emphasizing that the pace of disinflation will guide future policy decisions. Her remarks align with the Fed's dual mandate of price stability and maximum employment, which requires careful balancing as inflation remains above the 2% target while the labor market stays resilient. The term premium in long-term Treasury yields has been volatile, reflecting uncertainty about the neutral rate and fiscal policy, while swap spreads have tightened, indicating reduced hedging demand. The Fed's balance-sheet runoff continues to drain reserves, adding a layer of complexity to the rate outlook.
For interest rate traders, Daly's comments reinforce the prevailing view that the Fed is in no rush to cut rates. While inflation has eased from its peaks, the persistence of services inflation and a resilient labor market keep the Fed on hold. The uncertainty Daly highlighted—ranging from global growth risks to domestic fiscal policy—suggests that rate cuts may be delayed further. The yield curve has remained inverted for over a year, a classic recession signal, but the steepening trend in recent months reflects expectations of eventual easing. The ECB's transmission protection instrument (TPI) has helped contain peripheral spreads, but global rate divergence remains a risk. Traders can monitor real-time rate quotes on NowPrice for the latest pricing of Fed funds futures and Treasury yields.
Looking ahead, markets will focus on upcoming inflation data, particularly the Consumer Price Index and Personal Consumption Expenditures reports, for confirmation that disinflation is on track. Daly's remarks also underscore the importance of the Fed's dual mandate: balancing price stability with maximum employment. Any signs of labor market softening could shift the policy calculus, but for now, the Fed remains cautious. The term-premium decomposition suggests that investors are demanding higher compensation for holding long-dated bonds, while swap spreads indicate that liquidity conditions are stable. The Fed's balance-sheet reduction continues to tighten financial conditions, and any acceleration in runoff could amplify rate volatility. For now, the path of rates hinges on incoming data and the evolution of global risks.