Fed’s Daly says rate cuts could start next month

San Francisco Federal Reserve President Mary Daly reiterated expectations for interest rate cuts to commence as soon as September, despite recent stronger retail sales and wholesale price data. Daly cited a cooling labor market and a 'slowing but not slow' economy, projecting 'a couple of cuts' this year while emphasizing data dependency to avoid undue harm to the labor market. Markets currently reflect an 83% probability of a 25-basis-point rate reduction in September.

Analysis

San Francisco Federal Reserve President Mary Daly's recent comments reinforce a dovish monetary policy stance, signaling a high likelihood of an initial interest rate cut in September despite conflicting economic data. While acknowledging stronger-than-expected July retail sales and wholesale price inflation, her focus remains on a "cooling labor market" and a desire to proactively support employment. This indicates a willingness to tolerate some inflation persistence to avoid overtightening. Daly's projection of "a couple of cuts" in the current year, while data-dependent, aligns with a market that has already priced in an 83% probability of a 25-basis-point reduction in September. Her statements serve to solidify market expectations for imminent easing, emphasizing the Fed's dual mandate by prioritizing the labor market over waiting for conclusive evidence of inflation's return to target.

Key Decisions for Investors

• Given the high probability (83%) of a September rate cut reinforced by Daly's comments, investors may consider maintaining or initiating positions that benefit from lower interest rates, such as long-duration fixed income and rate-sensitive growth equities.
• Investors should place significant emphasis on upcoming labor market data, as its continued 'cooling' was cited as the primary justification for the dovish pivot, making it the most critical indicator for confirming the Fed's path.
• Monitor upcoming inflation reports closely, as any significant upside surprises represent the primary risk to the dovish outlook and could trigger a rapid repricing of rate expectations and market volatility.