Fed’s Daly says 50 basis point rate cut next month doesn’t seem warranted, WSJ reports

Fed Official Downplays Chances of Aggressive Rate Cut Next Month

San Francisco Federal Reserve President Mary Daly recently stated that a 50 basis point (0.50%) interest rate cut next month doesn’t seem necessary, according to a report by the Wall Street Journal. This statement comes as markets have been increasingly pricing in the possibility of a more aggressive rate cut by the Federal Reserve in September due to growing concerns over a potential economic slowdown. Daly’s comments suggest a more cautious approach within the Fed.

Key Takeaways for Investors:

• Rate Cut Expectations Tempered: Daly’s remarks contrast with current market sentiment, which favors a larger rate cut. Her view indicates potential disagreement within the Federal Reserve on the appropriate path of monetary policy. This uncertainty could lead to increased market volatility as investors reassess their expectations. Weekly Market Outlook — Data, Diplomacy, and Deadlines
• Focus on Economic Data: The Fed’s decision will ultimately hinge on incoming economic data. Investors should pay close attention to key indicators such as inflation, employment figures, and GDP growth in the coming weeks, as these will likely influence the Fed’s decision. Truce extended, economic data next
• Impact on Dollar and Bonds: A smaller rate cut, or no cut at all, could strengthen the US dollar, as it would signal a less dovish Fed. This could put downward pressure on emerging market currencies. Bond yields may also react, potentially rising if the Fed opts for a smaller cut than anticipated. Dollar steadies after weakness; sterling helped by GDP data Rupee outlook hinges on US tariffs, RBI action; bonds to track inflation data

Daly’s Reasoning:

While Daly acknowledged some risks to the economy, she emphasized the importance of data-driven decision-making. She indicated that the current economic situation doesn’t warrant a drastic move, suggesting the Fed prefers a gradual approach to adjusting monetary policy. This measured stance suggests the Fed is walking a tightrope between supporting economic growth and managing inflation expectations.

Potential Scenarios and Their Implications:

• Scenario 1: 25 Basis Point Cut: This is now seemingly the more likely scenario. Markets might react negatively initially if a 50 basis point cut was priced in, but the impact could be muted.
• Scenario 2: No Rate Cut: This would likely lead to significant market volatility and potentially trigger a sell-off in risk assets, as it would signal the Fed is less concerned about economic growth than previously thought.
• Scenario 3: 50 Basis Point Cut: While less likely given Daly’s comments, if the Fed opts for a larger cut, it would signal heightened concern about the economy, which could initially boost market sentiment but also raise questions about the longer-term outlook.

What to Watch For:

Investors should closely monitor upcoming economic data releases, including the August jobs report and inflation figures. Statements from other Fed officials will also be crucial in gauging the consensus within the central bank. Are investors worried about the U.S. economy? Here’s what Capital Economics says. The next Fed meeting in September will be a key event for markets, and Daly’s comments provide valuable insight into the potential direction of monetary policy.