No Need to Raise Rates Even with This Bond Sell-Off? Daly Says Fed Credibility Is Not at Risk

San Francisco Federal Reserve President Mary Daly said on Thursday (20th) that the U.S. Treasury market shows the Federal Reserve's (Fed) current monetary policy stance is largely appropriate, and she sees no evidence that the Fed's credibility is under threat or that there is an urgent need for preventive rate hikes.

Since the Fed held interest rates steady for the fifth consecutive time at its July meeting—and gave no indication of an imminent rate hike—investors have continued aggressively selling U.S. Treasuries, particularly long-dated bonds. The yield on 30-year U.S. Treasuries briefly rose to its highest level since 2007. Market concerns center on the continued expansion of U.S. debt and inflation exceeding the Fed's 2% target for over five years.

On Wednesday, the U.S. Treasury announced an expansion of long-term bond buybacks, temporarily lowering yields, but this effect largely disappeared by Thursday. Daly declined to comment on the Treasury's actions, stating only that observing bond prices is crucial for interpreting policy signals. She also noted that rising yields might reflect increased market demand for AI products and infrastructure, rather than simply questioning the Fed's ability to control inflation.

At the July Fed meeting, three policymakers cast dissenting votes, arguing for a rate hike to prevent inflation from becoming unanchored. Daly does not hold a voting seat on the Federal Open Market Committee (FOMC) this year but supported holding rates steady in July. She acknowledged that the risk of inflation becoming broader and more persistent is rising, but stressed that she has not yet seen worrying signs, and recent inflation and employment data have not changed her assessment.

Daly reiterated that price shocks from tariffs, rising oil prices, and AI should be temporary, and with monetary policy remaining slightly restrictive, inflation is expected to resume its downward trend. As a labor economist, she also stated there are currently no signs that the labor market is driving up price pressures.

Data released after the July meeting has eased near-term pressure on the Fed to raise rates. Inflation cooled in both June and July, retail sales declined in July, and job growth unexpectedly slowed. Traders now estimate about a 30% chance of a rate hike in September, significantly lower than the over 70% probability at the end of July.