Fed’s Daly says rate cuts could start next month, sees “couple” this year

San Francisco Fed President Mary Daly reiterated expectations for interest rate cuts to commence as early as September, despite recent stronger retail sales and an unexpected rise in wholesale prices. She cited a cooling labor market and a slowing economy as justification, maintaining a projection of two rate reductions this year contingent on incoming data. Markets currently assign an 83% probability to a 25-basis-point cut in September.

Analysis

San Francisco Federal Reserve President Mary Daly has reinforced a dovish monetary policy stance, indicating that interest rate cuts could commence as early as September. This outlook is maintained despite recent data showing stronger-than-expected retail sales and an unexpected increase in wholesale prices. Daly's rationale hinges on a perceived cooling in the labor market and a broader economic slowdown, which she weighs against inflation that remains above the central bank's target. Her comments signal a prioritization of the Fed's employment mandate, suggesting a willingness to act pre-emptively to support the labor market rather than waiting for absolute clarity on inflation's trajectory. She framed two rate reductions this year as a "reasonable projection," while emphasizing that the final decision remains data-dependent. This commentary aligns with and reinforces current market sentiment, where the Fed Rate Monitor Tool indicates an 83% probability of a 25-basis-point cut at the September meeting.

Key Decisions for Investors

• Given that market pricing already reflects an 83% probability of a September rate cut, investors should recognize that Daly's dovish comments largely confirm existing expectations, potentially limiting further upside from this specific news.
• Investors should heighten their scrutiny of upcoming labor market and inflation reports, as Daly explicitly stated the projection for two cuts is conditional and could be revised based on this incoming data.
• Consider the risk that Daly's dovish view may not be shared by all FOMC members, meaning any subsequent hawkish commentary from other officials could introduce significant volatility and challenge the market's current consensus.