San Francisco Fed President Mary Daly Talks Treasury Buybacks

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, podcasts, radio, news.

**Jonathan Ferro** (0:07)
Joining us now to extend the conversation on the Federal Reserve, the San Francisco Fed president, Mary Daly, joined us for more. President Daly, always good to hear from you, so thanks for making some time for Bloomberg surveillance.

**Lisa Abramowicz** (0:17)
Glad to be here.

**Jonathan Ferro** (0:17)
I want to bring up the bond market, and I'm sure you anticipate I would go there first. The long bond and the rise we're seeing in yields.
President Daly, from your standpoint, what signal, if any, do you take from the seller for the long end?

**Mary Daly** (0:30)
Well, you know, when you look at the long end, it is typically driven by structural factors like fiscal sustainability, geopolitical rebalancing, the massive AI investment for this industrial renaissance, which people are very excited about, and those factors are driving this. The thing that I look at specifically is this is happening across the globe. It's not just a US phenomena, it's a global phenomena.
And it doesn't give us a lot of signal about what we should do in the policy adjustments or the policy calibration for the Fed. And there, we look at the short end more than the longer end, paying attention to the longer end, but really focusing on the job number one, which is restoring price stability right now.

**Lisa Abramowicz** (1:09)
Do you think, President Daly, that the long end of the yield curve is doing some of the work for the Federal Reserve by tightening monetary conditions in a more significant way?

**Mary Daly** (1:19)
You know, I always hesitate to say that the market's doing our work, but what I will say is, it begs the question, what problem are we trying to solve by adjusting policy preemptively? You know, there's a lot of discussion about our credibility. There, I don't see our credibility at risk. I also hear a lot about, should we be making preemptive cuts, or hikes, rather, and I don't see a lot of evidence that that's an urgent problem to solve. So really, this is about watching the inputs from the financial markets, looking at the 30, the 10, and the two, and asking, are we getting mixed signals or different signals? And right now, on the shorter end of the yield curve, markets seem to have priced in a little bit more tightening, but they're reacting to the data just like we would expect them to. Inflation prints a little softer than they expect, the labor market a little softer than they expect, they push out rate hikes that they had priced in, and adjust as the data comes. So I think they seem to be signaling to us that they understand our reaction function, and importantly, I'm looking at inflation compensation and inflation expectations, and you don't see any worrisome swings in those pieces of data either. So I think policy is in a good place, but watching this 10 in 30 to see what we need to think about, what are the structural factors, it's giving us a signal about something, and I think one of the big signals is the AI demand.

**Lisa Abramowicz** (2:41)
President Dela, we'll get into AI demand, but I am curious about the reaction function. You said that the market seems to be understanding the Fed's reaction function. What is your reaction function in terms of incoming information that would make you think that an adjustment higher for rates would be required?

**Mary Daly** (2:59)
Well, you know, last week I gave a speech where I talked about really there's many scenarios that could occur, but two seem very important for me at this point. One is the one that I would suggest is the modal outlook. My modal outlook is that, and also you saw in the minutes, it's a majority of the participants' modal outlook, that inflation is being driven up by a series of shocks, and those shocks will roll up, they'll roll down, they'll roll through, and as that dissipates, that inflation will return to target, in part because we have policy at a very slightly restrictive level. So there's that dynamic. But then there's the dynamic of maybe that the fact that we have so many shocks coming at once and they're overlapping, they can have an independent compounding effect that means that the total effect is greater than the sum of its parts. The conventional dynamics of shocks just aren't working like they were. I'm not seeing evidence of that right now, but I definitely think we should keep that in mind. And watching, if that happens, we would have to, we'd have an inflation problem that we would want to treat with tighter policy. In the meantime, I was very supportive of the July hold and continue to look at the information that comes between now and the next meeting about whether any signs of that, that worrisome dynamic would be forming. And I haven't seen them yet. And the recent prints on both inflation and the labor market didn't really change that picture for me at this point.