Background and Justification
Mary Daly, President of the Federal Reserve Bank of San Francisco, recently signaled that an interest rate cut in the U.S. is approaching, provided that economic indicators such as inflation and labor market conditions continue to develop positively. Daly emphasized that she sees two interest rate cuts possible this year, although uncertainty regarding economic outlooks persists.
Daly expressed her views in several interviews and events. She mentioned that the main forecast is to start adjusting interest rates in the fall, which is attributed to the possible effects of tariffs on inflation. Daly describes three potential scenarios for the effects of tariffs on prices: a delayed but sustained inflation effect, a one-time price increase, or minimal price impacts.
Possible Impacts on the Markets
An interest rate cut by the Federal Reserve could have significant impacts on the markets:
- Currency Markets: The U.S. dollar could weaken against other currencies, such as the British pound, as investors speculate on an interest rate cut.
- Stock Markets: An interest rate cut could lead to higher stock prices as more favorable credit conditions benefit businesses and consumers.
- Bond Markets: The yields on government bonds could decrease as an interest rate cut would increase demand for bonds.
Uncertainties and Challenges
Despite the positive outlooks, uncertainties remain, particularly concerning inflation and the labor market. Daly stressed that the decision to cut interest rates depends on further developments in these areas. Additionally, external factors such as tariffs and geopolitical tensions could influence economic conditions.
Overall, Mary Daly signals that the Federal Reserve is ready to adjust interest rates to support the economy, provided that economic indicators remain positive. This strategy could have both positive and negative impacts on the markets, depending on specific economic conditions and external factors.