Daly sees no case for preemptive hikes as inflation holds at 3.4%

San Francisco Fed President Mary Daly said the central bank has no evidence requiring preemptive rate hikes, pushing back against market pricing that assigns a 40.5 percent probability of a hike by October.

"I am looking for more concerning signs of inflation, but I have not seen them yet," Daly, a 2027 FOMC voter, said in remarks reported Wednesday. "The Fed's policy is in good shape."

Daly's comments come as the Federal Open Market Committee holds its target range at 3.50 percent to 3.75 percent after a 9-3 vote in July to keep rates unchanged. The July consumer price index showed annual inflation at 3.4 percent, down from 3.5 percent in June but still well above the Fed's 2 percent target. Core PCE prices, the Fed's preferred gauge, are expected to have risen 3.3 percent in July from a year earlier, a much hotter reading than the CPI.

The remarks carry weight because Daly votes on the FOMC in 2027, and they suggest the Fed is not leaning toward preemptive tightening. However, her concern about stacked inflation shocks — from the Iran conflict, tariffs, and AI infrastructure investment — leaves the door open for hikes if price pressures persist. The next FOMC meeting is scheduled for September.

Rate Hike Odds Climb to 40.5% for October

Daly said rising bond yields do not send a policy signal, and she sees no evidence that the labor market is pushing inflation higher. She also said she has not observed broad inflation spillover from the AI construction boom, even as technology companies issue record amounts of debt to fund data center expansion.

Her stance contrasts with the tone of the July FOMC minutes, released Wednesday, which showed "many participants assessed that policy tightening would likely be necessary if inflation did not decline." Three members dissented from the July decision, favoring an immediate hike. Fed Chair Kevin Warsh has said he prefers to let the market lead on rates, but the minutes showed some officials worried that financial conditions might not be sufficiently restrictive to return inflation to target.

Market pricing reflects the divide. Futures markets assign a 26 percent probability of a hike at the September meeting, down from 28 percent over the past 24 hours, but the October meeting shows a 40.5 percent likelihood. The gap between the two meetings suggests investors see the Fed waiting for more data before acting.

Treasury Yields at Multi-Year Highs

The 10-year Treasury yield touched 4.7 percent this week, the highest level in more than a year, while the 30-year yield reached its highest since 2007, eclipsing 5.30 percent. Mortgage rates have followed the 10-year higher, lifting borrowing costs for potential homebuyers. The Treasury Department said Wednesday it would more than double its purchases of long-term debt, a move that helped pull yields lower.

The backup in long-end yields reflects a mix of heavy fiscal supply, AI-related corporate issuance competing for capital, and residual energy-price inflation risk. Lawrence Gillum, chief fixed income strategist at LPL Financial, called the move "a necessary normalization, not a crisis," noting the market is finally pricing term premium again after years of suppression.

Daly acknowledged that two softer inflation prints have not clarified the picture. "The labor market is stable, and I am focused on inflation," she said. The last time the Fed faced a similar inflation trajectory — above target with energy shocks from a Middle East conflict — it held rates for several meetings before data confirmed the disinflation path.

The Fed's next decision comes in September, with markets pricing a 26 percent probability of a hike at that meeting. If inflation continues to moderate, Daly's stance suggests the committee could hold through year-end. But if energy prices keep climbing — gasoline is already above $4 a gallon — the stacked shock scenario she flagged could force the committee's hand.

This article is for informational purposes only and does not constitute investment advice.