FOMC Voting Member Daly Signals Ongoing Rate Cut, While Bond Markets Show Doubt

2024 FOMC voting member and Federal Reserve Bank of San Francisco President Mary Daly indicated that the U.S. central bank is expected to continue cutting interest rates to prevent further weakening of the labor market. Daly stated, So far, I haven't seen any information that would suggest we wouldn't continue to reduce the interest rate. She emphasized the importance of adjusting policy to protect the labor market, noting that the current rate is tight for an economy approaching the Fed's 2% inflation target.

"We will continue to adjust policy to make sure it fits the economy that we have and the one that's evolving," Daly added, reinforcing the need for rate cuts to align with the changing economic landscape.

However, other Federal Reserve officials expressed a more cautious stance. Speaking at separate events earlier in the week, they suggested a slower pace of rate cuts than what was indicated by the Fed's September half-point reduction.

Dallas Fed President Lorie Logan emphasized caution amid economic uncertainty, advocating for a gradual reduction in rates. A strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals, she stated.

Similarly, Minneapolis Fed President Neel Kashkari predicted "modest cuts" over the coming quarters to bring the rate to a neutral position, while Kansas City Fed President Jeff Schmid warned against outsized moves given the uncertainties around policy outcomes.

Third-Party Insights Signal Slower Rate Cuts

External research also leans toward a slower pace of rate cuts from the Fed. Torsten Slok, chief economist at Apollo Management, noted that the chances of the Fed leaving rates unchanged in November are increasing as the U.S. economy remains resilient. 

Slok pointed to strong GDP growth, with the Atlanta Fed projecting third-quarter growth at 3.4%, and suggested that the U.S. is on a no landing trajectory, where the economy continues to grow, potentially reigniting inflation.

Bond Markets Expect Lower Rate Cuts

In the bond markets, investors are betting that the Fed's future rate cuts may be more modest than previously anticipated. The yield on the U.S. 10-year Treasury rose above 4.2% for the first time since July, driven by several factors. The U.S. job market remains robust, and the Bloomberg Economic Surprise Index, which measures data exceeding economists' expectations, has reached its highest level since May.

Rising Budget Deficits and Bond Issuance Concerns

Moreover, the increasing likelihood of Donald Trump winning the 2024 election is influencing market sentiment. If Trump is re-elected, he has signaled a preference for higher tariffs and more relaxed fiscal policy, which could result in faster inflation and rising debt levels as tariff costs are passed on to consumers.

Compounding market concerns is the growing U.S. budget deficit. The International Monetary Fund (IMF) predicts that U.S. debt will exceed 100% of GDP next year, and Deutsche Bank analysts forecast that the deficit could range between 7% and 9% from 2026 through 2028, regardless of who occupies the White House. As deficits widen, the issuance of bonds is expected to increase, putting additional pressure on the bond market.

In summary, while some Fed officials favor continued rate cuts to safeguard the labor market, a range of voices are urging caution. Bond investors and analysts are increasingly skeptical about the pace and magnitude of future cuts, especially as fiscal uncertainties loom larger.