San Francisco Fed President Mary Daly shared her cautious optimism about inflation during a rare Good Friday discussion, emphasising patience in economic strategy.
Despite some sectors slowing, like transport, she noted the US economy is maintaining momentum with resilient consumer and business spending. The labour market is cooling gradually without major issues.
Monetary Policy
Regarding inflation, Daly pointed out that the restrictive policy is necessary to exert downward pressure. However, this process is expected to be very gradual, with inflation risks requiring careful monitoring. She remains committed to achieving the 2% inflation target.
On monetary policy, Daly stated there is no rush to adjust policies as they are currently well-positioned. The Summary of Economic Projections (SEP) median suggests two rate cuts this year, but they may be fewer if inflation proves persistent. The policy will adapt based on growth and inflation data, with a focus on gradual rate reductions. She mentioned that the neutral rate may be rising, with current estimates around 3% still uncertain.
While the market sees a 70% chance of a June rate cut, Fed officials, including Daly, do not currently foresee this happening.
Daly’s remarks, delivered during an unusual holiday appearance, were both measured and clear: the current stance of monetary policy is achieving its goal, but no shift should be expected soon. Her reference to a persistently firm economy, paired with controlled labour market easing, tells us there is little urgency within the committee to act prematurely. Put plainly, the message is that economic health remains intact, and policy patience is warranted.
Inflation and Interest Rates
We are told that inflation remains sticky enough to justify keeping interest rates elevated, despite the fact that demand is showing early signs of tempering. It’s also evident from Daly’s framing that while policy is tight, the effects are being felt in a contained and progressive fashion. Her stress on persistence and the need for continued observation points toward a narrower path to cuts than markets might have hoped for earlier this year.
The SEP’s suggestion of two cuts in 2024 can be interpreted less as a definitive forecast and more as a conditional guideline, anchored to how inflation data behaves over the coming months. What we hear between the lines is a readiness to lower rates — not to stimulate, but to adjust — only if disinflation proceeds at a measurable pace.
The reference to a potentially higher neutral rate — a level that neither fuels nor restricts growth — adds more complexity. With current guesses moving toward 3%, higher than pre-pandemic levels, it means that even with eventual easing, borrowing costs may not return to past norms. The market will need to adjust its range of expectations accordingly.
As for June, despite what implied probabilities suggest, the rhetoric from policymakers has leaned in the opposite direction. Market anticipations of an early cut appear misaligned. Those probabilities need reassessment quickly, because delays in positioning could result in awkward consequences.
What this means for us, very simply, is that short-term interest rate assumptions should be revisited in light of the latest communication. We should pay particular attention to inflation prints — not just the headline figures, but month-on-month progress, core services trends, and wage growth. These are now the tight levers policymakers are watching. If further softness is not demonstrated in a consistent and broadening way, the hurdle for delivering those anticipated rate cuts will remain elevated.
Overall, it is unlikely that we will see firm monetary policy projections shift without a corresponding shift in the underlying data. We would do well not to position for rate cuts until the data gives policymakers a clear way forward. The wait may be longer, and that should be built into strategy now.
