San Francisco Federal Reserve Bank President Mary Daly said the current monetary policy environment is favorable, but there is too much uncertainty in the economic outlook to predict the direction of interest rates.
“Regardless of how the economic situation evolves, we are prepared to respond,” Daly said Thursday at the Bloomberg Technology Conference in San Francisco. “I believe providing more forward guidance on what might happen in the future could ultimately be misleading, as we can only wait and see how the economy unfolds.”
Federal Reserve officials are expected to keep interest rates unchanged at their next meeting on June 16–17 in Washington, D.C., the first gathering under new Chair Kevin Warsh. This trend has also spread to prices of goods such as fertilizers and equipment, driven by persistently high energy prices due to ongoing conflicts in the Middle East.
In April, the Federal Reserve’s preferred inflation measure rose 3.8% year-on-year, marking the largest increase since 2023. Policymakers also noted that the labor market has stabilized, with the unemployment rate at 4.3%.
An increasing number of officials are hoping the Federal Reserve will signal that all options—including rate cuts and hikes—are on the table in the coming months.
Investors believe there is a high likelihood of interest rate hikes by year-end, according to federal funds futures contracts.
The head of global fixed-income research at Morgan Stanley said that if policymakers believe it is necessary to raise interest rates this year, the Federal Reserve might overlook the impact of the Iran war on prices.
“We believe the Fed will ignore this,” Andrew Sheets said on Thursday on Bloomberg’s “Surveillance” program. “The Fed will view it as a growth shock rather than an inflation shock. Therefore, we don’t think this will be a factor prompting the Fed to raise interest rates.”
Hitz said the core inflation measure is “well above the Federal Reserve’s target.”
“I think, as we enter the second half of the year, there is reason to worry that the Fed has succeeded on the employment front but not on inflation,” he said.
But he added that war may not be the main culprit. Instead, the drivers could be a combination of loose fiscal policy, accelerating bank lending growth, and spending in the artificial intelligence sector. However, Hitz said Morgan Stanley expects inflation to improve in the second half of the year.
“We believe inflation will decline,” he said. The labor market will remain volatile, “with enough uncertainty to keep the Fed on hold this year and set the stage for a rate cut next year—our base expectation.”
