Federal Reserve Bank of San Francisco President Mary Daly said on Thursday that signals from the U.S. Treasury market indicate that monetary policy is currently well-positioned.
In a televised interview, Daly dismissed suggestions that the Fed's credibility was at stake. "There's a lot of discussion about our credibility there. I don't see our credibility at risk," she said. She also addressed suggestions that policymakers should act preemptively on rates - whether by cutting or raising them - and said she did not see strong evidence that such moves were immediately required.
Since the Fed's July meeting, investors in the Treasury market have stepped up selling, a trend most visible in longer-dated securities. That activity pushed 30-year yields to their highest point since 2007. Market participants have cited concerns tied to the U.S. budget deficit and inflation running above the Fed's 2% target for more than five years.
The Treasury Department unveiled a plan on Wednesday to increase buybacks of longer-dated debt. Any downward pressure on long-term yields following that announcement proved fleeting: the yield gains were largely reversed on Thursday. Daly declined to comment on the specifics of the Treasury's actions.
Daly emphasized that bond prices can serve as meaningful policy signals. She added that changes in those prices may also be reflecting elevated demand for artificial intelligence products and the infrastructure that supports them.
At the July policy meeting, three Fed policymakers dissented, preferring an interest-rate increase amid concerns that inflation would not return to the 2% target without tighter policy.
Fresh economic readings since that meeting have reduced near-term pressure on policymakers to move rates higher. June and July inflation data showed moderation in price growth, retail sales dropped in July, and employers unexpectedly reduced payrolls. Correspondingly, market-implied odds of a September rate increase have fallen — traders now assign about a 30% probability, down from levels that topped 70% at the end of July.
Context and market implications
- Bond market dynamics are being interpreted by Daly as a check on the need for immediate policy shifts.
- Stronger selling in long-dated Treasuries has lifted 30-year yields to their highest since 2007, reflecting fiscal and inflation concerns.
- Recent macroeconomic data has eased the perceived urgency of a near-term rate hike, shifting trader odds markedly since late July.