Mary Daly, President of the Federal Reserve Bank of San Francisco, spoke at the Forum Club of the Palm Beaches in Florida. She expressed that a rate cut is necessary, considering the current inflation and labor market situation.

Inflation and Labor Market Issues

Inflation is still higher than the target, and Daly stressed the importance of tackling this problem. She pointed out that the labor market is showing some signs of softening, which calls for a policy that is somewhat restrictive. Daly is open-minded about the upcoming December meeting. She believes that the recent 50 basis point rate cuts have positioned the Federal Reserve well for future decisions. She mentioned that it’s normal for Federal Open Market Committee members to disagree during uncertain times, highlighting the need for careful decision-making amidst risks. This article was written by Agustin Wazne, a Junior News Editor at FXStreet, who focuses on commodities and major currency pairs. It includes a legal disclaimer stating that the information is for informational purposes only and not investment advice. So far this year, the Fed has cut rates by 50 basis points, which was a positive move. But the warning about inflation still being above the target is crucial. The last Core PCE reading for September was a stubborn 2.9%, meaning the path ahead is uncertain, and the easier part of tackling inflation is behind us. The labor market has softened, justifying the Federal Reserve’s recent cuts. The latest jobs report from early October showed that payrolls grew by just 160,000, and the unemployment rate remains at 4.0%. This trend supports the idea of a pause, as the Fed now has to balance its inflation goals with keeping employment stable.

Market Expectations and Future Fed Actions

Daly’s “open mind on December” signals that we can expect more market volatility. It’s wise to consider options that can benefit from increased volatility, like straddles on equity indices or interest rate futures that expire after the mid-December FOMC meeting. The futures market indicates about a 55% chance of a pause, showing how mixed expectations are. This uncertainty might limit the strength of the US Dollar in the short term. If the Fed stops hiking rates while other central banks do not, it could weaken the dollar, similar to what we saw in late 2023 when the market first anticipated rate cuts. This suggests opportunities might arise where the dollar could underperform compared to currencies from central banks with a more aggressive stance. Create your live VT Markets account and start trading now.

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