Federal Reserve Bank of San Francisco President Mary Daly emphasized that Fed policymakers should be open to more rate cuts. This is mainly due to inflation risks and the chance of a productivity boom that could lead to growth without raising prices. Tariff-related price increases haven’t resulted in widespread inflation. With a softer job market, the balance of risks has changed. Job growth is slowing, not because of immigration policies, but due to reduced demand for workers. Although inflation has gone down, it remains high, and monetary policy still feels somewhat tight. However, the economy has shown strong performance this year. Comments on Daly’s statements received a neutral rating of 5.4 from FXStreet Fed Speechtracker. The US Dollar Index stood at 99.65, up by 0.1% for the day.

The Role of the Federal Reserve

The Federal Reserve shapes US monetary policy by focusing on price stability and full employment, mainly through adjusting interest rates. It holds eight policy meetings each year, and decisions are made by the Federal Open Market Committee (FOMC). Quantitative Easing (QE) increases credit flow, often weakening the US Dollar, while Quantitative Tightening (QT) does the opposite, usually strengthening the dollar. Officials at the Federal Reserve are now showing more readiness to consider further rate cuts, indicating a shift in risk balance. This hints at a move away from the aggressive inflation-fighting strategies that have defined policy in recent years. Traders should now factor in a higher likelihood of a more accommodating Fed in the upcoming months. This shift stems from the noticeable softening in the labor market. The October 2025 jobs report showed that the economy added only 140,000 jobs, which was below expectations. Additionally, the unemployment rate has risen to 4.2%. This data suggest that worker demand is declining, allowing the Fed to ease policy without quickly triggering increased wage pressures. At the same time, although inflation has decreased, it remains a concern. The latest Consumer Price Index for October 2025 is at 3.1%. This persistence above the 2% target explains why policy is still viewed as “modestly restrictive” and why officials are cautious about making drastic rate cuts. The tension between a cooling job market and ongoing inflation creates uncertainty around interest rate expectations.

The Path Forward for Interest Rates

Looking back, the Fed kept rates high throughout 2024 after its aggressive rate hikes in 2022 and 2023. With two small cuts already this year, the new language suggests that the Fed funds rate is likely to decrease. This situation is favorable for using options on SOFR futures to hedge against or speculate on the timing and size of the next rate change. A key factor mentioned is the potential for a productivity boom, which could support faster growth without causing inflation. In fact, third-quarter 2025 nonfarm productivity saw an unexpected increase of 2.5%, giving credence to this idea. If this trend keeps up, the Fed might feel more confident about cutting rates, which would be positive for equity markets and could be leveraged with call options on major indices. This dovish trend puts downward pressure on the US Dollar, which is trading around 99.65. As the likelihood of lower US interest rates increases, the dollar becomes less appealing to international investors. Currency traders should prepare for possible dollar weakness against other major currencies in the coming weeks. Create your live VT Markets account and start trading now.

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