Speaking in Santander at a Banco de España conference, San Francisco Fed President Mary Daly said she sees no signs the US economy is losing resilience even as inflation remains above target. She pointed to “exceedingly strong” investment growth and a stabilised labour market, while describing monetary policy as “slightly restrictive” and arguing that should help inflation ease. Daly attributed recent inflation pressure to tariffs and an oil price shock, but said oil has since come down and housing inflation has been easing; she added that resolution of tensions around the Strait of Hormuz would be positive for consumers and the broader economy.
Daly also addressed the “AI investment shock”, saying the economy is in the early stages of a potential exponential lift in productivity, a dynamic that could prove disinflationary over time. She cautioned that moving too quickly on policy could bridle growth, while moving too slowly could leave citizens facing persistent price pressures, and she declined to offer rate guidance given two-sided scenarios for inflation and growth. Separately, the FXS Speechtracker score was 6/10 versus a 5.7/10 historical average, while the FXS Fed Sentiment Index rose 0.25 points to 123.89.
Outlook for Economic Volatility and Fed Policy
Given the Federal Reserve’s current wait-and-see approach, we see a landscape ripe for volatility in the coming weeks. The balanced but slightly firm tone suggests the Fed is not ready to signal rate cuts, leaving markets highly sensitive to every new piece of economic data. This means we should prepare for sharp, short-term price swings around key data releases.
The persistence of inflation remains the central issue for the Fed, justifying its cautious stance. With the last Core PCE reading for May 2026 coming in at a sticky 2.9%, we believe bets on significant rate cuts in the near term are misplaced. Therefore, we are looking at options strategies that profit if interest rates remain elevated through the end of the summer.
At the same time, the labor market shows signs of healthy stabilization, not weakness that would force the Fed’s hand. The consensus forecast for the upcoming June Non-Farm Payrolls report is for a gain of around 175,000 jobs, a solid but not inflationary number. This balance supports strategies like iron condors on equity indices, which benefit from the market staying within a defined range.
Strategic Positioning Amid AI Productivity and Geopolitical Risks
The wild card mentioned is the productivity boost from AI, which could be a powerful long-term force against inflation. We are already seeing early signs of this, as a recent Bureau of Labor Statistics report noted a preliminary 0.5% rise in multi-factor productivity for the first quarter of 2026. This suggests that while we remain cautious on inflation in the short term, long-dated inflation swap positions might become less attractive.
Geopolitical factors, particularly oil prices, add another layer of uncertainty that we must hedge against. While the recent de-escalation of tensions near the Strait of Hormuz has helped pull WTI crude prices back below $80 a barrel, this situation remains fluid. We are using options on energy ETFs to protect against any sudden reversal or price spike.
This environment of data-dependency and two-sided risk makes derivatives based on the VIX index particularly attractive. We are positioning for an increase in implied volatility ahead of the next FOMC meeting at the end of July. Buying VIX call options or futures offers a direct way to profit from the market uncertainty we expect to see.
