Federal Reserve Bank of San Francisco President Mary Daly stated on Thursday that the US Treasury market suggests monetary policy is currently in a good position. She dismissed concerns about the Fed's credibility and the urgency of preemptive rate cuts or hikes, noting a lack of evidence for such actions. Daly emphasized the importance of monitoring bond prices for policy signals and suggested that heightened demand for AI products and infrastructure might also be influencing these prices.
Despite investors aggressively selling off bonds since the Fed's July meeting, where interest rates were held unchanged for the fifth consecutive time, Daly maintains that policy is in a "good place." Longer-dated securities, particularly 30-year bond yields, have surged to their highest levels since $2007$, reflecting worries about the US budget deficit and inflation remaining above the Fed's $2$% target for over five years. Three policymakers dissented at the July meeting, advocating for rate increases due to inflation concerns.
Daly, who does not vote on the Federal Open Market Committee, supported the decision to hold rates in July. She acknowledged a growing risk of inflation becoming more persistent but highlighted recent data, such as moderated inflation readings in June and July, a decline in retail sales in July, and unexpected job cuts, as factors reducing pressure for a near-term rate increase. Traders now anticipate only a $30$% chance of a rate hike in September, a significant drop from over $70$% at the end of July.
Regarding the Treasury Department's plan to increase buybacks of longer-dated debt, Daly declined to comment. However, she noted that the impact of this announcement on lowering long-term yields was short-lived, with gains largely reversing on Thursday. Daly clarified that while she observes the longer end of the bond market for structural factors like fiscal sustainability and AI investment, she primarily focuses on the shorter end for policy calibration, as it seems to reflect the market's understanding of the Fed's reaction function.
