Federal Reserve Bank of San Francisco President Mary Daly signaled on Friday that interest rates are likely to remain at current levels while policymakers assess whether the recent jump in oil prices feeds into broader inflation.
Speaking at the University of California, Berkeley, Daly said the central bank is in a “wait-and-see” phase, watching to see if higher energy costs spread into prices of goods and services before considering any policy shift.
Prospects for rate cuts fade
Daly previously saw scope for one or two rate cuts in 2026, but said future moves now depend on how inflation evolves and how long the geopolitical tensions behind the oil spike persist. A quick easing of those tensions could re-open the path to lower borrowing costs, she noted, but renewed inflation pressure would argue for keeping policy tight for longer.
Her remarks come against a backdrop of firmer inflation data. The latest Consumer Price Index showed prices up 3.3% year-on-year, with a 12.5% surge in energy costs driving the acceleration. That has pushed market expectations for near-term easing sharply lower.
Derivatives pricing currently implies only about a 7.1% chance of a rate cut by the June meeting, signaling that traders broadly expect restrictive policy to stay in place for the coming months.
Strong labor market undercuts need for stimulus
Daly highlighted that the U.S. economy continues to show underlying strength, with productivity gains offsetting slower labor-force growth. She said flat job growth could become a “steady state” in the years ahead as aging demographics limit workforce expansion.
For now, the labor backdrop remains solid. The latest jobs report showed a gain of 178,000 nonfarm positions in March, above expectations, alongside a 3.5% annual increase in average hourly earnings. That combination of steady hiring and rising wages leaves the Fed under little pressure to stimulate activity with lower rates.
Daly added that there is still room to lift labor-force participation over time through immigration and investment in technology, both of which could support longer-run productivity and potential growth.
Oil price swings keep policy path uncertain
Daly stressed that the outlook for both growth and inflation hinges on how long oil prices remain elevated and how persistent global tensions prove to be. The recent volatility has been pronounced: West Texas Intermediate crude futures fell sharply below $84 per barrel on Friday after reports of a possible ceasefire in the Middle East.
That rapid drop underscored how quickly the inflation narrative can shift with geopolitical headlines, reinforcing the Fed’s preference for a patient, data-dependent approach before committing to a new policy direction.
Consumers cautious but still spending, businesses guarded
Despite rising energy costs and uncertainty over the outlook, Daly said U.S. consumers are still spending, though with more caution. Businesses, she added, are maintaining a restrained form of optimism, balancing current resilience against concerns about future demand and borrowing costs.
Dollar retreats modestly but policy stance remains supportive
In currency trading on Friday, the U.S. dollar weakened against most major peers. It slipped 0.06% versus the euro, 0.12% against the pound, 0.60% against the yen, 0.20% against the Canadian dollar, 0.26% versus the Australian dollar, 0.16% against the New Zealand dollar, and 0.43% versus the Swiss franc. The euro gained 0.06% against the dollar and recorded smaller advances against other major currencies.
While the softer dollar may provide a short-term tailwind to some alternative assets, Daly’s message of “higher for longer” rates remains a dominant force. Historically, prolonged restrictive policy has tended to support a stronger national currency, presenting potential headwinds for assets priced in dollars.
Traders now broadly expect that a meaningful shift toward monetary easing will require a clearer and more sustained cooling in inflation data, particularly in energy and core prices, before the Fed is willing to pivot from its current stance.
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