Insights 
VT 
Mary Daly, President of the Federal Reserve Bank of San Francisco, spoke at the Forum Club of the Palm Beaches, Florida. She expressed her support for a rate cut, advising that it was the appropriate step, given the current state of inflation and the labour market’s condition.
Addressing Inflation And Labor Market Conditions
Inflation remains above target, and Daly emphasised the need to address this issue. She noted that the labour market has shown signs of softening, necessitating a modestly restrictive policy.
Daly has an open approach regarding the upcoming December meeting, and the recent cuts of 50 basis points better position the Federal Reserve for future actions. She believes that disagreements among Federal Open Market Committee members are natural in uncertain times, underscoring the importance of balanced decision-making amidst existing risks.
The article was authored by Agustin Wazne, who is a Junior News Editor at FXStreet, focusing on Commodities and major currency pairs. The content accompanies a legal disclaimer stating that the information is for informational purposes and not investment advice.
We’ve seen the Fed already cut rates by 50 basis points this year, which was a welcome move. However, the warning that inflation remains above target is the key message for us right now. With the last Core PCE reading for September coming in at a stubborn 2.9%, the path forward is clearly not set in stone and the easy part of the inflation fight is over.
The labor market has indeed softened, giving the Federal Reserve justification for its recent cuts. We saw this in the last jobs report from early October, which showed payrolls growing by only 160,000 and the unemployment rate holding at 4.0%. This trend supports the case for a pause, as the Fed now has to balance its inflation mandate with maintaining employment.
Market Expectations And Future Fed Moves
This “open mind on December” is a clear signal to expect more market choppiness. We should be looking at options that profit from a spike in volatility, such as straddles on equity indices or interest rate futures that expire after the mid-December FOMC meeting. The current pricing in the futures market, which shows roughly a 55% chance of a pause, highlights just how divided expectations are.
This uncertainty will likely put a cap on the US Dollar’s strength in the near term. A Fed that is done hiking, while other central banks might not be, can weaken the dollar, similar to patterns we observed in late 2023 when the market first anticipated rate cuts. This suggests we should look for opportunities where the dollar might underperform against currencies with more hawkish central bank outlooks.
