Fed patience on rates, watching oil spillover (with Mike McKee)

San Francisco Fed President Mary Daly downplays division over policy statement phrasing, saying actions matter more. The cutting cycle may not be over - if conflict ends and oil prices come back down without broader pass-through, underlying dynamics of slightly restrictive policy bringing inflation down could return. Key risk is how long the conflict lasts and whether oil price shock spills into other goods and services. Businesses and consumers are looking through the shock for now, but not forever.

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Fed patience on rates, watching oil spillover (with Mike McKee)

wti

If it ends soon, forward contracts for oil come back down to around $75.

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no reliable edge (random outcomes)

5/7/2026 9:32:54 PM	short term cautious down	5 days later	+5.87%	-2.93%

yields

Fed holding steady, higher for longer. Cutting cycle not necessarily over but depends on conflict duration and oil pass-through.

Mike McKee

San Francisco Fed President Mary Daly has downplayed the division among policymakers over the policy statement. She told Bloomberg exclusively that the phrasing of the communication is less important than the Fed's action.
Mary Daly

Markets have priced in equal probabilities of a cut versus a hike, but the most likely probability is that we hold steady. The real signal is that everyone agreed to the decision. The communication is higher for longer relative to last year, but households, businesses and markets had already priced that in.
Mike McKee

Do you still feel that cutting is the path for monetary policy?
Mary Daly

It all comes back to how long does the conflict last. If it's prolonged, we might see more spillovers of oil and other commodity prices into other goods and services. If it ends soon, forward contracts for oil come back down to around $75. Businesses are looking through the shock, but it won't be forever that they can look through it.
Mike McKee

Is the cutting cycle over now?
Mary Daly

I don't think it's really too early to tell. If the conflict ends and oil prices come back down and that doesn't get passed into the broader economy, then I expect inflation to come back down to our 2% target. The main issue is how long the conflict lasts and whether we can really get that 2% target.
Mary Daly

It's too early to tell. If the conflict ends and oil prices come back down without passing into the broader economy, I expect the underlying dynamics to return: policy slightly restrictive, downward pressure on inflation, stable labor market, cautiously optimistic businesses. Inflation should come back down to 2% target. But the main issue is how the oil price shock moves through the economy and how long the conflict lasts.

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