Fed’s Daly sees bond market as policy signal

Investing.com -- Federal Reserve Bank of San Francisco President Mary Daly said Thursday that the US Treasury market indicates monetary policy is currently well-positioned.

"There's a lot of discussion about our credibility there. I don't see our credibility at risk," Daly said in a Bloomberg Television interview. "I also hear a lot about, should we be making preemptive cuts — or hikes, rather? And I don't see a lot of evidence that that's an urgent problem to solve."

Bond investors have increased selling activity since the Fed's July meeting, where officials maintained interest rates unchanged for the fifth consecutive time without indicating an imminent rate hike. The selling has been most pronounced in longer-dated securities, with 30-year bond yields reaching their highest levels since 2007. This reflects concerns about the US budget deficit and inflation remaining above the Fed's 2% target for more than five years.

The Treasury Department announced a plan Wednesday to increase buybacks of longer-dated debt. The announcement's effect on lowering long-term yields appeared brief as those gains were largely reversed Thursday. Daly declined to comment on the Treasury's actions.

Daly said bond prices provide important policy signals. She added that they may also reflect heightened demand for AI products and infrastructure.

Three policymakers dissented at the July meeting, preferring to raise interest rates due to concerns that inflation will not return to the Fed's target without tighter monetary policy.

New data since the July meeting has reduced pressure on the Fed to consider a near-term rate increase. Inflation readings in June and July showed price growth had moderated. Retail sales fell in July and employers unexpectedly cut jobs. Traders now see about a 30% chance of a rate hike in September after topping 70% at the end of July.

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