San Francisco Federal Reserve President Mary Daly said on Thursday that US monetary policy is in a good place.
She said the labor market is in a stronger position after 75 basis points of rate cuts.
Monetary Policy Outlook
Daly said inflation is still easing, except in the goods sector.
At the time of writing, the US Dollar Index (DXY) was near 97.83, up 0.10% on the day.
Looking back at 2025, officials said monetary policy was in a good place. The labor market had stabilized after 75 basis points of rate cuts, and it looked like the economy achieved a soft landing. That view helped support risk assets through much of last year.
But the picture has changed as of February 20, 2026. January’s CPI report showed core inflation rising again to 2.9% year-over-year, led by higher services costs. This challenges the earlier view that inflation was steadily falling outside the goods sector.
Market Implications For Traders
The labor market is also tighter than it was in 2025. The latest jobs report showed 260,000 new positions, and the unemployment rate fell to 3.5%. This strength is pushing wages higher and makes the Federal Reserve’s next steps harder.
Markets have repriced sharply because of this. Fed funds futures, which previously pointed to more rate cuts, now suggest the Fed may hold rates steady through 2026. A rate hike before year-end is still unlikely, but it is now part of the conversation.
For traders, this suggests volatility may be underpriced. The VIX, near 17, may not fully reflect the rising uncertainty. That could make long-volatility option trades more appealing. Consider VIX calls or straddles on major equity indices.
The US Dollar Index (DXY), which traded near 97.8 last year, is now holding around 105.2. With yield differentials still supportive, dips in the dollar may offer buying opportunities. Traders can use currency futures or options to position for continued dollar strength versus currencies backed by more dovish central banks.
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