Daly debates Fed rate amid inflation uncertainty

San Francisco Fed President Mary Daly weighs the Federal Reserve's potential interest rate decisions amidst uncertain inflationary trends, highlighting the dual scenarios influencing policy deliberations.

By Ahmed Azzam | @3zzamous | 10 May 2024

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  • Canadian Dollar surges on robust job data, outperforming Sterling.

  • Fed's Bostic hints at potential rate cuts amid uncertainty.

  • Daly of San Francisco Fed discusses inflation's impact on interest rates.

  • Market awaits U of Michigan data for further cues on Dollar's trajectory.

The Canadian Dollar experienced a robust surge during the early US trading session following the release of significantly stronger-than-anticipated job data, which surpassed market forecasts. Emerging as the top performer of the day, the Loonie overshadowed the Sterling, which saw a modest lift from robust UK GDP figures. Meanwhile, the Dollar exhibited marginal strength against other currencies, with its trajectory hinging on market response to the forthcoming University of Michigan consumer sentiment and inflation expectations.

In April, Canada witnessed a substantial uptick in employment, with a notable increase of 90.4k, well exceeding market projections of 17.5k. Despite this surge, the unemployment rate remained unchanged at 6.1%, below the anticipated 6.2%. The employment rate held steady at 61.4%, while total hours worked demonstrated a 0.8% month-on-month rise. Additionally, average hourly wages registered a year-on-year growth of 4.7%, slightly decelerating from March's 5.1%.

In an interview with Reuters, Atlanta Federal Reserve President Raphael Bostic conveyed the Fed's inclination towards potential interest rate reductions later this year. However, uncertainties persist regarding the timing and extent of such policy adjustments, as well as the gradual pace of inflationary deceleration.

San Francisco Fed President Mary Daly discussed the intricate landscape of US inflation, characterizing it as prone to volatility in the foreseeable future. Daly underscored the uncertainty surrounding forthcoming inflationary trends, envisioning a potentially "bumpy ride" ahead. Presenting two plausible scenarios, Daly outlined the factors that could influence the Fed's interest rate deliberations. In the first scenario, if inflation continues its recent downward trajectory alongside a cooling job market, Daly indicated that a reduction in interest rates would be warranted. Conversely, Daly posited a second scenario where inflation remains stagnant, akin to observations in the first quarter of the year. In such a scenario, Daly asserted that interest rate cuts would not be appropriate unless accompanied by a concurrent weakening in the labor market.