Federal Reserve Bank of San Francisco President Mary Daly stated that the monetary policy is well-positioned and moderately restrictive. She conveyed this message during a fireside chat at the California Bankers Association 25th Annual Conference and Directors Forum.

She noted that businesses exhibit caution amid uncertainties but are not stalling. Daly expressed that solid growth, a strong labour market, and decreasing inflation are desired outcomes.

Adaptability Of Fed Policy

She assured that the Federal Reserve’s policy is adaptable to economic developments. Patience is emphasised as a key approach in the current economic landscape.

Daly also mentioned that loan demand remains robust, and credit quality is maintaining good standards. These factors play a role in the ongoing economic assessment.

To understand the remarks made by Daly, it’s important to unpack the message being conveyed here. At its core, what she’s suggesting is that interest rates are currently set at a level designed to cool inflation without shutting down economic activity. By describing policy as “moderately restrictive,” she means that borrowing costs are high enough to ease supply-demand imbalances but not so high as to completely choke off credit or investment flows. It’s a balancing act, and one requiring more observation than intervention for the time being.

Her tone isn’t one signalling any immediate change—there’s no sense of urgency to pivot policy or rush into further adjustments. Instead, there’s a strong lean towards staying the course, watching data closely, and reacting only if things shift beyond what’s expected. Economic growth is still ticking along, people are largely able to find employment, and inflation, while not yet at target, is easing from previous highs. These are all symptoms of a system that’s responding, even if slowly, to prior policy moves.

The fact that firms remain active, even in uncertain conditions, means there’s still resilience lurking beneath the headlines. And from what we gather, borrowing appetite remains intact and the quality of that credit isn’t deteriorating. That’s encouraging, especially when gauging how well markets and households are adjusting to higher rates.

Market Consistency And Reaction

From our vantage point, the key message is about consistency. Shifts in expectations need not be abrupt, especially in derivatives trading, where shallow misreadings of tone can produce unnecessarily large reactions. Daly isn’t jawboning the market into repositioning; this isn’t a call to front-run policy change. It’s actually the opposite—stay patient, stay reactive, not predictive.

Adjustments in implied volatility may already reflect this stabilised tone. What we’ve seen lately is a plateau in short-term rate expectations, which ought to reduce directional pressure on rate-sensitive contracts. That said, opportunities persist. Gradual change doesn’t mean inaction; it means precision matters more than ever.

In times like this, we anchor our view to data—not headlines, not sentiment. Rates look like they’re in a holding pattern, and the onus now is on inflation trends and credit indicators. If credit standards start slipping or loan performance worsens, that’s another discussion. But for now, yields and curves may drift, not lurch.

Further, in Dealer positioning and client flows, we note continued appetite for protection on both sides—steepeners and flatteners aren’t leaning too heavily one way or another, which reflects the same balance Daly outlined.

We watch for inflection points, yes, but we don’t position for them every time someone speaks. What matters more here is that the policy regime appears to favour methodical moves, not sudden course corrections.

What’s implied is a backdrop where shorter-dated vol may remain compressed unless jolted by an external catalyst. Open interest movements suggest that across the front end, traders are keeping exposures minimal, and rightly so.

This message from Daly reinforces that. We’re not in an ‘act now’ environment. We’re in a ‘watch carefully, trim where necessary’ mode. That kind of setting rewards selective bets, not sweeping ones.

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