Fed's Daly says inflation her main focus right now

San Francisco Fed President Mary Daly indicated that two interest rate cuts this year remain possible, aligning with the Fed's March projections, but emphasized the need to maintain steady rates until inflation convincingly moves towards the 2% target. Daly highlighted the strength of the labor market and the importance of monitoring economic data for signs of weakening or inflationary pressures, particularly in light of uncertainties surrounding trade policies. She noted that the economy's current state, characterized by slowing but not collapsing growth and easing inflation, suggests the Fed is not forced to choose between fighting inflation and supporting the economy, supporting the potential for rate cuts later in the year, though the distribution of risks remains considerable.

Analysis

San Francisco Fed President Mary Daly affirmed the possibility of two interest rate cuts in the current year, consistent with the Federal Reserve's March projections, yet stressed that policy rates, which the article states were kept in the 4.25%-4.5% range earlier in the month (a level maintained since December), should hold steady until inflation demonstrates a convincing trajectory towards the 2% target. Daly highlighted that with inflation, by the Fed's preferred measure, at 2.3% and the labor market robust with unemployment at 4.2%, inflation remains the primary focus, necessitating a "modestly or moderately restrictive" policy stance. The broader economic picture, characterized by slowing but not collapsing growth and easing inflation, suggests the Fed is not currently forced into a trade-off between controlling inflation and supporting economic activity. However, significant uncertainty persists, particularly surrounding the economic impact of the Trump administration's trade policies, which are perceived as risks to both employment and inflation. Daly's anecdotal observations, such as "counting cranes," indicate ongoing construction activity, but she also noted businesses are adopting a more cautious approach to expansion, for instance, "opening five stores... instead of 10." This cautious business behavior, coupled with fluctuating trade policy clarity, contributes to a "pretty large" distribution of risks around the baseline projection for rate cuts, underscoring the Fed's data-dependent and agile approach to future policy decisions.

Key Decisions for Investors

• Investors should maintain a vigilant watch on incoming inflation data and labor market reports, as San Francisco Fed President Daly explicitly tied the timing of potential rate cuts to inflation moving convincingly towards the 2% target and continued labor market strength.
• While the prospect of two rate cuts this year, as per the Fed's March projections, could be supportive for markets, the significant uncertainties, particularly from trade policy and persistent inflation, warrant a balanced portfolio approach prepared for potential volatility.
• Monitor leading indicators of business sentiment and investment, such as construction activity and corporate expansion plans referenced by Daly, as shifts here could signal changes in the economic outlook and influence the Fed's assessment of whether rate cuts are appropriate later in the year.