Mary Daly, President of the Federal Reserve Bank of San Francisco, said on Bloomberg TV on Thursday that she does not see evidence that longer-run inflation expectations have risen. She said wage rises are consistent with 2% inflation.
She said the Federal Open Market Committee agreed to hold interest rates. She said the action mattered more than the phrasing of the statement.
Fed Commitment To Price Stability
Daly said the Fed is working towards price stability without overreacting. She said the public understands the Fed’s commitment to price stability.
She said producers and sellers are still hesitant to pass on higher prices. She said outcomes depend on how long the Iran conflict lasts.
She said that if the conflict ends, earlier positive dynamics could return. The report also said that policymaker speeches can clarify how the FOMC could respond, and that forecast scenarios may help communicate the rate outlook.
It seems the Federal Reserve is signaling it will hold rates steady, as the real action is the unanimous agreement to pause. We see this as a sign they will not overreact to short-term data. The latest Core PCE reading for March 2026, which came in at 2.7%, supports this patient stance as inflation continues its slow descent from what we saw in 2025.
Implications For Rates Markets
For interest rate derivatives, this suggests the market may be pricing in too much risk of a future hike. We believe positions that benefit from stable or slightly lower rates, like buying SOFR futures for late 2026 delivery, could be advantageous. This is a contrast to the first half of 2025, when the market incorrectly priced in rate cuts that never materialized.
This stability should dampen market volatility, making strategies that involve selling options premium more attractive. With the VIX index recently falling below 16 after the Q1 2026 earnings volatility, selling put spreads on the S&P 500 could be a prudent way to generate income. We are being told that producers are still hesitant to pass on higher input costs, which further supports a lower-volatility environment.
The geopolitical situation, particularly with Iran, remains a key variable for energy markets. An end to that conflict could trigger a sharp drop in oil prices as positive supply dynamics return. We should consider buying medium-term puts on WTI crude oil futures as a hedge or a speculative play on diplomatic progress.
A less aggressive Fed typically weighs on the US dollar. The Dollar Index (DXY) has already softened to near 104.5 over the past month, a trend we expect to continue. We can use options on currency-tracking ETFs to position for further dollar weakness against currencies like the Euro or Yen.
