San Francisco Federal Reserve President Mary Daly said she sees no evidence that would call for pre-emptive interest rate hikes, arguing that monetary policy is well positioned and that recent economic data do not justify a shift toward tighter policy. As head of one of the 12 regional Federal Reserve banks, Daly participates in Federal Open Market Committee discussions, where officials weigh the central bank's dual mandate of maximum employment and price stability.

Among her key remarks:

• The rise in long-term yields is a global issue, not a signal for the Fed
• She doesn't see Fed credibility at risk
• Short-term yields show markets understand the Fed's reaction function
• Policy is in a good place, watching markets
• She doesn't see evidence calling for pre-emptive rate hikes
• Her modal outlook expects inflation shocks will dissipate
• She was very supportive of the Fed's July interest rate hold
• Recent jobs and inflation data have not changed the outlook so far
• She is looking for signs of more worrying inflation, not seeing that
• The job market is not contributing to inflation right now
• The Fed will stick to its job regardless of Treasury action
• The Fed really has to focus on achieving its inflation target
• She doesn't see any signs of labor market faltering
• She is not seeing broad inflation spillover from AI buildout
• Two softer prints didn't clear up the inflation picture
• We are still in a good place to watch the data
• The labor market is stable; her attention is on inflation
• The Fed is missing its inflation goal by quite a bit

Daly pushed back against concerns that rising long-term Treasury yields should be interpreted as a signal that the Federal Reserve needs to respond with rate increases. The distinction matters for how policymakers read markets: the Fed directly administers short-term rates, while longer-dated yields are set by investors and embed expectations for growth and inflation as well as the extra compensation demanded for holding longer-maturity debt — factors that can move yields for reasons well beyond U.S. monetary policy. Daly characterized the climb in longer-dated yields as a global phenomenon rather than a reflection of concerns about Fed policy, and noted that short-term yields suggest financial markets continue to understand the central bank's reaction function, the framework officials use to respond to changing economic conditions. She added that she does not see the Fed's credibility at risk.

While acknowledging that inflation remains above the Fed's 2% objective and that the Fed is missing its inflation goal by quite a bit, Daly argued there is little evidence to support a pre-emptive tightening of monetary policy — that is, raising rates ahead of a feared inflation pickup rather than in response to one. She reiterated that policymakers remain committed to achieving their inflation objective regardless of fiscal developments or Treasury decisions, and said she was strongly supportive of the Federal Reserve's decision to leave interest rates unchanged at its July meeting. Her modal expectation, she said, is that inflationary shocks will gradually dissipate over time, and recent employment and inflation reports have not materially altered her outlook so far.

Although inflation has shown some softer readings, Daly cautioned that "two softer prints" are not enough to conclude that price pressures are firmly moving back toward target. She said she is looking for signs of more worrying inflation but is not seeing them, adding that the Fed is still in a good place to watch the data.

On the labor market, Daly highlighted its resilience, saying she sees no signs of deterioration or faltering and does not believe employment conditions are currently contributing to inflationary pressures. She described the labor market as stable, with her attention focused primarily on inflation — the side of the Fed's two-part mandate where progress toward goal has lagged.

Daly added that she is not seeing broad inflationary spillovers from the rapid expansion of artificial intelligence investment and infrastructure spending. AI-related outlays, such as data centers and the power capacity needed to run them, have drawn significant investor attention as a potential source of demand pressure, but she suggested the impact on economy-wide inflation remains limited for now.

Daly generally leans on the dovish side and will be a voter in 2027, meaning her direct vote on rate decisions comes later even as her views feed into the committee's ongoing debate. Her remarks point attention toward upcoming employment and inflation reports as the evidence that would, in her view, justify any change in the policy stance.

Source: Investinglive