Daly says Fed in good place as markets price 98.9% hold chance

San Francisco Fed President Mary Daly said the central bank's policy stance is well-positioned, reinforcing market expectations for no rate change at the June meeting even as inflation remains above the 2% target.

Daly's assessment that the Fed's policy stance is "in a good place" reinforces market pricing for a 98.9% probability of no rate change at the June 16-17 meeting, with swaps markets discounting just a 2% chance of a quarter-point cut, according to CME FedWatch data.

"Current policy is in good condition, but future uncertainties exist," Daly, a 2027 FOMC voter, said Thursday. She described herself as "cautiously optimistic" about the economy, adding there's "no urgency to make an adjustment" to interest rates.

The comments come as the S&P 500 and Nasdaq 100 notched fresh all-time highs Friday, with the Dow Jones Industrial Average also closing at a record. The 10-year Treasury yield edged up 0.2 basis point to 4.449%, while the dollar index fell to a two-week low amid optimism over a potential US-Iran peace deal that pushed crude oil to a five-week low.

Daly's remarks place her among the more patient Fed officials, contrasting with Kansas City Fed President Jeff Schmid, who said "now is not the time to let down our guard" on inflation. Minneapolis Fed President Neel Kashkari struck a middle ground, saying it's "premature to conclude we need to be raising rates right away" and that the central bank should keep watching data as the Middle East conflict unfolds.

The fed funds rate has stood at 5.25% to 5.50% since July 2023, following 525 basis points of tightening over the prior 18 months. The last time the Fed used similarly cautious language was in the months before its September 2024 easing cycle began, when officials signaled patience while inflation data remained sticky. The S&P 500 rose 12% in the six months following that pivot, as markets priced in eventual rate relief.

Economic data released this week painted a mixed picture. The core PCE price index — the Fed's preferred inflation gauge — rose 0.2% month over month and 3.3% year over year in April, above the central bank's 2% target. First-quarter GDP growth was revised downward to 1.6% annualized from an initial 2% estimate, while the May Chicago PMI surged to 62.7, its strongest reading in 4.25 years, signaling expansion in manufacturing.

New York Fed President John Williams said Thursday the central bank's policy stance is well-positioned to respond to economic effects from the Middle East conflict. St. Louis Fed President Alberto Musalem warned the Fed may need to raise rates if inflation does not begin easing within six months.

Investors will monitor speeches Friday from Fed Vice Chair for Supervision Michelle Bowman, Kansas City Fed President Schmid, Philadelphia Fed President Anna Paulson, and San Francisco Fed President Daly for further clues on the policy path. The next FOMC decision is scheduled for June 16-17, with markets overwhelmingly expecting a hold.

This article is for informational purposes only and does not constitute investment advice.