Daly Joins Doves: Surprise Fed Shift Sparks Fresh July Rate Cut Buzz

Federal Reserve officials delivered a mix of familiar and surprising messages on Thursday, offering insight into how the central bank is processing inflation, tariffs, and labor market dynamics heading into the July policy meeting. The remarks followed Wednesday's release of the FOMC minutes, which confirmed a baseline preference to remain patient and wait for more data before making a move. Market odds for a July rate cut remain low, but a more dovish tone from San Francisco Fed President Mary Daly added a new wrinkle.

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Daly, who is not a voting member this year but remains highly influential within the Fed, signaled that the case for lowering interest rates is growing. Speaking at a Market News International event, she said the economy is in a good place and added, "It’s time to think about adjusting the interest rate". Daly floated the idea of two rate cuts as a likely outcome this year, noting that economic fundamentals support a move toward lower rates. She emphasized that holding steady for too long in hopes of inflation reaccelerating could result in a policy mistake, saying, "Waiting for inflation to rise or become persistent could leave us behind".

Daly also addressed one of the biggest macro concerns in recent months: tariffs. With President Trump’s trade policies driving uncertainty, she offered some reassurance, suggesting that the inflationary effects of recent tariff hikes may be more muted than feared. Firms, she noted, may have learned how to adjust pricing and supply chains without passing on full costs to consumers. "It’s possible it just doesn’t materialize", she said of tariff-driven inflation.

Her comments come amid ongoing signs of labor market cooling. Daly said supply and demand in the labor market are roughly in balance and noted that recent jobless claims data were positive. While she acknowledged that real labor market weakening could justify a cut, she framed the decision as part of a broader risk management exercise, where easing policy too late could undermine the Fed’s ability to keep the recovery intact.

Federal Reserve Governor Christopher Waller, who has already called for a July rate cut, largely reiterated his stance. Speaking at the Dallas Fed, Waller defended his view that monetary policy is too tight, even after a strong June jobs report. "If inflation is coming down, you don’t need to be as restrictive anymore," he said. Waller dismissed claims that his dovish tilt is politically motivated, responding to speculation about his potential nomination to succeed Jerome Powell as Fed chair. "That’s my view... It’s not political", he said.

Waller's argument is rooted in economic data: core inflation has eased, and the labor market, while still solid, has shown signs of stabilization. He added that new tariffs don’t pose a systemic inflation threat and should not deter the Fed from acting if the underlying data support a cut. His comments, while not new, reinforce a minority but vocal view on the FOMC that sees scope for a July cut.

Beyond policy rates, Waller also addressed the Fed’s balance sheet strategy. He advocated for gradually shifting the central bank’s $6.7 trillion portfolio toward shorter-term Treasury bills, arguing it would reduce interest rate risk and better match the Fed’s liabilities. This maturity-matching approach, he said, could make the balance sheet more flexible and safer. Waller also pushed back on criticism that the Fed wastes money by paying interest to banks, noting that the payments are simply a pass-through of Treasury interest obligations.

St. Louis Fed President Alberto Musalem also spoke, but his remarks were broadly in line with past commentary and consistent with the consensus camp that favors a wait-and-see stance. He did not break new ground or shift market expectations.

The combined message from Thursday’s speakers points to a central bank still weighing its next steps carefully. Daly’s remarks stood out most, both for their tone and timing, hinting at increased openness to easing even before clear deterioration in inflation or jobs data. That contrasts with the FOMC minutes, which emphasized the need for more evidence before adjusting policy.

Investors remain skeptical of a July rate cut, with futures markets pricing in less than a 7% probability. However, that outlook could shift sharply with the release of next Tuesday’s CPI report, which now looms as a crucial test of the Fed’s inflation narrative. A soft print could embolden doves like Daly and Waller, while another firm reading could delay any move until the fall.

For now, the Fed appears united in its desire to avoid a misstep. But divisions over timing are becoming more visible, and Thursday’s comments make clear that the debate is far from settled.