The Federal Reserve Stays Cautious Amid Uncertainty


San Francisco Fed President Mary Daly expressed the need for the Federal Reserve to adopt a wait-and-see approach in light of the high uncertainty surrounding the outlook for the U.S. economy. Speaking at a banking conference in Frankfurt, Daly emphasized the importance of cautious decision-making during uncertain times.

Boldness to Wait

Daly acknowledged that while it may be tempting to make aggressive moves when the destination is clear and crucial, there are times when exercising patience becomes a different form of boldness. Daly asserted that during periods of high uncertainty and when risks are evenly balanced, it is necessary to embrace gradualism and acknowledge that there is still much unknown.

Uncertain Objectives

Daly highlighted that the Federal Reserve lacks certainty regarding two important factors. First, they are unsure whether inflation will successfully reach the target of 2%. Second, the central bank is uncertain about whether the negative effects resulting from past tightening measures have fully impacted the economy. Additionally, Daly raised concerns about whether current observations reflect temporary post-pandemic recovery patterns or signify long-term shifts in the national and global economy.

Market Expectations

Traders in derivative markets have adjusted their expectations based on this cautious stance. They now anticipate that the Federal Reserve will maintain interest rates until next May, with a potential rate cut as the next move. The central bank previously raised its benchmark rate to a range of 5.25%-5.5% in July.

Treasury Yields

In early Friday trading, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) witnessed a slight increase to 4.44%.

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