San Francisco Fed President Mary Daly weighed in on the implications of the recent spike in the benchmark 10-year Treasury note yield, which marked a 16-year peak at 4.8%.
“If financial conditions… remain tight, the need for us to take further action is diminished,” she said yesterday, adding that the role of the financial markets in this scenario, suggesting that “they’ve done the work.”
On the market’s response to rising bond yields, she observed a dip in probabilities for another hike at the upcoming November meeting. “To me, that says the markets are understanding how we think about things and they do have the reaction function in mind,” she elaborated.
Daly reiterated that continual observation of economic indicators, specifically a “cooling labor market” and inflation gravitating towards target, could justify steadiness in interest rates.
She elaborated that maintaining rates isn’t a passive stance but an “active policy action,” especially as declining inflation augments the restrictive impact of existing policy measures.
However, she also emphasized adaptability, hinting that should economic indicators such as growth and inflation not decelerate as expected, or if financial conditions become overly relaxed, Fed is prepared to raise rates until monetary policy achieves its desired restrictiveness. “We need to keep an open mind, and have optionality,” she underscored.
