Federal Reserve's Daly Confident in Gradual Inflation Reduction Policy

Mary Daly, the President of the Federal Reserve Bank of San Francisco, recently stated that the current monetary policy of the Federal Reserve is in a "good position" to continue driving inflation down gradually. She acknowledged that achieving the Federal Reserve's 2% target for inflation this year may be challenging, but she expressed confidence in the policy's effectiveness. Daly emphasized the Federal Reserve's commitment to reducing inflation to its target level, highlighting that progress is being made and that the policy remains well-positioned to achieve this goal.

Daly made these remarks during an event in Oakland, California. She noted that the labor market is cooling but remains robust, and she expects inflation to continue to decline over time. "Our current policy is well-matched to the current economic situation, so we can wait for more data to guide future decisions," she said. The Federal Reserve has maintained interest rates unchanged since the beginning of the year, as policymakers believe the economy is fundamentally sound and needs space to observe the impact of policy changes such as tariffs.

Daly also highlighted that the slight slowdown in the labor market is a natural process towards a more sustainable employment structure. "This helps achieve a labor market balance consistent with the 2% inflation target," she said. However, the series of tariff measures pushed by President Trump have created significant uncertainty in the business community, exacerbating hesitation in investment and hiring decisions. The U.S. Court of International Trade ruled this week that some of Trump's global tariffs are "illegal," although the government has appealed and temporarily suspended the ruling, adding more uncertainty to the market.

Meanwhile, the focus of the bond market has shifted from tariffs to the rising debt levels in the United States. John Waldron, the President of Goldman Sachs, stated at the Bernstein conference on Thursday that while attention was previously on tariffs, the bond market is now more concerned with the U.S. fiscal situation and budget debates. "From a macro perspective, the biggest risk is not tariffs but debt," he said. Waldron noted that the U.S. Treasury is increasing the issuance of government bonds, particularly long-term bonds, which is driving up long-term yields and increasing the government's financing costs. This also exacerbates the fiscal deficit and the overall debt burden on the economy.

Just a week ago, the yield on 30-year U.S. Treasury bonds rose to its highest level in nearly 20 years, reflecting market concerns about the fiscal outlook. Currently, President Trump is negotiating with Congress on a tax cut bill for specific groups, which, if passed, could further exacerbate the fiscal deficit. Goldman Sachs' Vice Chairman and of the Dallas Federal Reserve, Kaplan, also noted that Goldman Sachs' clients are now more focused on the trend of 10-year U.S. Treasury yields rather than the federal funds rate.

Despite these challenges, Waldron remains optimistic about the resilience of the U.S. economy. "The U.S. economy and consumers have shown remarkable resilience, frankly, this has surprised me, but it is an undeniable fact," he said. However, he also acknowledged that market volatility caused by tariffs has affected Goldman Sachs' investment banking revenue in the second quarter, which lagged behind the first quarter. This trend is consistent with analyst expectations. Despite the adverse factors, Waldron remains optimistic about the IPO market. "We completed eight IPOs last week, indicating that the market is gradually recovering," he said.