Fed’s Daly: Two rate cuts, more or less, appropriate this year

San Francisco Federal Reserve President Mary Daly signaled she remains on board for beginning policy easing as soon as next month, projecting "a couple of cuts sometime this year," likely two. This outlook, articulated following recent stronger-than-expected retail sales and wholesale price increases, is predicated on a softening labor market and slowing economy, balanced against inflation still above target. Daly stressed the importance of not delaying cuts and potentially harming the labor market while awaiting absolute clarity on inflation.

Analysis

San Francisco Federal Reserve President Mary Daly has signaled a continued dovish stance on monetary policy, indicating a potential start to rate cuts as soon as next month and projecting "a couple of cuts" for the current year, with two being a good baseline. This forward guidance is particularly noteworthy as it follows recent economic reports showing stronger-than-expected retail sales and an unexpected increase in wholesale prices, data points that could be interpreted as inflationary. Daly's rationale hinges on balancing a softening labor market and a slowing, yet not slow, economy against inflation that remains above the Fed's target. She explicitly stated a desire to avoid being overly cautious on inflation at the expense of the labor market, suggesting a willingness to begin easing policy before absolute certainty on inflation is achieved. This perspective highlights a key tension within the Fed's dual mandate and points to a proactive approach to supporting economic activity.

Key Decisions for Investors

• Daly's dovish commentary, despite recent strong economic data, reinforces the case for potential rate cuts in 2024, which could provide a tailwind for rate-sensitive assets like technology stocks and long-duration bonds.
• Investors should pay heightened attention to upcoming labor market and inflation reports, as Daly explicitly stated that the number and timing of cuts are data-dependent and could deviate from the current projection of two.
• The commentary suggests a potential risk-on environment, warranting a review of portfolios for opportunities in growth-oriented sectors that would benefit from a lower interest rate environment.
• Remain cautious of the underlying conflict between supporting the labor market and taming inflation, as any signs of re-accelerating price pressures could force a hawkish pivot and challenge the current market narrative.