Mary Daly, President of the Federal Reserve Bank of San Francisco, noted that there are increasing signs tariffs might not lead to a prolonged rise in inflation, which could pave the way for a rate cut in autumn.

Evidence suggests that tariffs may not cause a large or sustained inflation surge. Although the labour market shows signs of slowing, there are no indicators of it weakening critically.

Current Monetary Policy Position

Currently, monetary policy is considered well-placed. The expectation has been that rate adjustments would commence in the autumn for some time.

Daly’s remarks confirm what has already been circulating in market discussions for some months. The assumption has largely been that import levies would feed directly into marginally higher prices, but emerging trends indicate this effect may be less long-lasting than initially feared. That view, combined with signals from employment data suggesting resilience rather than vulnerability, begins to build a clearer picture of where policy may head.

Job creation has cooled, but not alarmingly so. So what we’re seeing, if we align the dots, is the kind of moderation that keeps pressure in check without setting off alarm bells. Wages continuing to grow without spiking supports this argument—demand for workers remains relatively healthy, while pressure from the supply side of labour has not become unsustainable. There’s no suggestion, however, that this loosening requires urgent corrective action.

Policy Flexibility and Market Reactions

Policy as it stands has flexibility built in. The phrase “well-placed” isn’t thrown around lightly in the current environment; it reflects a stance that neither fuels unnecessary speculation nor appears overly cautious. The bond market has already leaned into the prospect of autumn moves, and swaps pricing continues to reflect that consensus. With the next few CPI prints expected to thread somewhere between flat and modest, there’s currently little to compel dramatic near-term shifts in positioning.

For those of us reading into the nuance, Daly’s view lines up with recent core goods data, which is largely stable. Services inflation deserves a closer look, but any heating there hasn’t derailed the broader narrative. This opens a window. It may be a narrow one, but it’s visible enough for action to be taken before the year closes, provided incoming data doesn’t throw a wrench in forecasts.

What we ought to consider now is hedging against a later-than-expected pivot, even though the bias is still skewed towards that being a low-probability outcome. Two-year yields and futures curves still lean towards a beginning of easing within Q4. This matches up with the Fed’s communications tone over recent weeks—not dovish, but certainly less defensive than earlier in the year.

In terms of guidance, the pricing of path-dependent instruments may begin to diverge slightly as confidence builds around a window between late September and November. This doesn’t guarantee commitment, but it does provide room to reduce volatility exposure in shorter tenors. Those of us active in rate vol would do well to treat front-end implieds as more sensitive to the next two PCE figures than to headline payroll.

Notably, the sharp reactions we had seen to trade and tariff headlines appear to be softening. This dampened transmission effect suggests markets no longer expect those measures to stir sudden accelerations in demand-driven pricing. Instead, we’re observing more measured shifts in expectations, particularly in dollar-neutral strategies.

So, while we wouldn’t call the outlook entirely predictable, forward-implieds suggest a reduced probability of a forced reversal. That’s not a green light for full repositioning, but it’s enough to step lightly into conditional trades. Medium-dated options that lean into a November policy change may offer fair risk-reward, especially with rate path volatility calming.

Positioning in linear rate products should still factor in rollover technicals and CPI trend breaks. But if the macro tone doesn’t turn hawkish in the next month or so, it’s reasonable to expect further curve steepening, particularly if end-2025 expectations start re-anchoring closer to the Fed’s own summary of projections.

There will still be uncertainty. Growth isn’t booming, consumer sentiment remains cautious, and global trade flows remain dampened. But what we are being told—through words and data—is that enabling flexibility may now matter more than exercising restraint. And this subtle shift is what should be translating into positioning choices over the weeks ahead.

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