Mary Daly – A succession of incidents have blighted the last year, but the repercussions of inflation are still being felt today.

While it has lessened considerably, the Federal Reserve is on track to hike interest rates again in order to address the remaining issue.

The necessity of another rate rise was also emphasized by Mary Daly, President of the San Francisco Fed.

The news

On Saturday, Mary Daly stated that the Federal Reserve should not only raise but also maintain interest rates at current levels.

She said that doing so would allow them to deal with the rising prices brought on by inflation.

“There is more work to do,” said Daly at Princeton University.

“In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”

“Restoring price stability is our mandate, and it is what the American people expect. So, the FOMIC remains resolute in achieving this goal.”

Mary Daly also admitted that excessive inflation and the Fed’s aggressive rate increases to bring prices down caused fear on Main Street and Wall Street.

“The responses range from fearing these actions will tip the economy into a recession to fearing they won’t be enough to get the job done.”

With the announcement of new economic data, the concern drove dramatic market fluctuations, as uncertainty motivates investors to seek rapid solutions.

Nonetheless, Daly believes that accomplishing the stated target will take time and “a broader view.”

Additionally, Mary Daly stated that the Fed’s current tightening strategy was (and continues to be) reasonable given the volume and duration of high inflation readings.

Daly also challenges the disinflationary trend, citing substantial inflation in the goods, housing, and associated sectors, as well as robust economic indicators.

While Mary Daly does not presently vote on Fed policy, she is a member of the Federal Open Market Committee and attends policy meetings.

Federal Reserve warnings

The Federal Reserve issued similar warnings a week before Mary Daly’s address.

Minneapolis Federal Reserve President Neel Kashkari stated last Wednesday that he is open to the potential of a higher interest rate rise during the Fed’s March policy meeting.

“Whether it’s 25 or 50 basis points,” said Kashkari.

Similarly, Atlanta Fed President Raphael Bostic shared similar comments, stating that the Fed’s policy rate should be raised by half a percentage point at the next meeting.

A day later, Fed Governor Christopher cautioned that interest rates might rise faster than expected.

He alluded to a string of better-than-expected economic figures.

Read also: Stocks dropped in 2nd month of the year

Interest rate progress

The Federal Reserve has done a lot in the last year to keep inflation under control.

It increased its goal range from nearly zero to 4.5% to 4.75%.

They lowered their raises to a quarter of a percentage point in February, after dropping half a percentage point in December.

Inflation had reached a four-decade high in 2022, but it began to recede in the last quarter.

Yet, January inflation figures revealed that the rate of price rises was gradually increasing again.

Gold price

Gold prices have paused as a result of the several warnings issued in recent weeks.

Prices fell from an early two-and-a-half-week high on Monday, as traders awaited US Federal Reserve Chair Jerome Powell’s judgment for signals on future rate rises.

Spot gold had earlier reached a high of $1,858.19 per ounce on February 15, but it is presently down 0.3% at $1,849.33 per ounce.

Meanwhile, gold futures in the United States climbed modestly, reaching $1,855.10.

Also, the dollar index rose 0.1%, making greenback-priced bullion more costly for foreign purchasers.

Awaiting testimony

Many are anticipating Powell’s testimony to Congress on Tuesday and Wednesday, followed by the February jobs report on Friday.

“Currently, gold is in a wait-and-see mode,” said UBS analyst Giovanni Staunovo.

“There’s unlikely to be a change of script from Powell, reiterating the need for further rate hikes to bring inflation under control.”

While gold is often used as a hedge against inflation, increasing interest rates may reduce demand for zero-yielding metal.

Mary Daly discussed the potential of interest rates rising (and remaining there) if data continues to be hotter than expected on Saturday.

According to Reuters technical expert Wang Tao, current gold might continue advances into a range of $1,867 to $1,876 per ounce due to resistance breaching at $1,853.

Image source: CNN

Several American stocks decreased on Monday as the Dow Jones share decreased by 0.5%, the S&P 500 1.2%, and the Nasdaq Composite 2.3%. A day later, the shares finished lower, prompting investors to prepare for the most significant inflation in four decades.

Market leader

The inflation report threw a shadow on the economic calendar. As a result, investors are currently hesitating to open new positions, even if the White House rejected the report and explained that it was obsolete.

“The overarching driver of trade today is the CPI report tomorrow and investors’ reluctance to get out directionally one way or the other in advance of it,” said Janney Montgomery Scott chief investment March Luschini. 

Operators also remain wary of corporate earnings prospects amid signs of slowing global economic growth. However, the drop in commodity prices has given hope that the Federal Reserve will cut interest rates again next year.

“There’s been some talk of peak inflation in the US due – among other reasons – to a fall in some agriculture food prices,” said City Index financial markets analyst Fawad Razaqzada. “After all, it was the soaring prices of wheat, corn, and other soft commodities, as well as energy, that have boosted inflation so much over the past year or so.”

“With these prices coming down a little, this is clearly some good news – and some light at the end of the tunnel,” Razaqzada added.

Despite his optimism, Fawad Razaqzada believes the decline in commodity prices won’t be reflected in the June consumer price index. “So, just like May, there is a risk that inflation could overshoot again. If so, this will likely trigger fresh gains for the dollar.”

Investors have expressed concern about the currency’s impact on corporate earnings as the dollar’s value skyrockets.

“Investors are thinking about what it means in terms of tightening financial conditions,” said Luschini. “Plus the fact that it will work to be counterproductive to earnings.”

The dollar rose higher than its major rivals, but pulled back from a two-decade high for the ICE US Dollar DXY Index on Tuesday after the EURUSD approached parity with the US currency for the first time in over 20 years.

Major banks kick off the earnings season

According to FactSet, analysts expect an average 4.3% increase for companies in the S&P 500, the weakest since late 2020. Analysts predicted 5.9% growth in April, but the difference reflects growing concerns that inflation and rising borrowing costs imposed by central banks are pushing down profit margins.

Turning to economic data, the National Federation of Independent Business said Tuesday that the small business optimism index took a hit, last seen in the early months of the 2020 pandemic, showing that the index has collapsed in five of the past six months.

A survey found that 34% of respondents cite inflation as their top concern, indicating that inflation continues to hurt small businesses.

Meanwhile, the US 10-year yield BX: TMUBMUSD10Y fell 2.958% as traders sought security from public debt. However, the rally in Treasuries caused the spread between 2-year and 10-year bonds to narrow to -8.5 basis points, the deepest inversion since early 2007.

The U.S equity futures struggled in pre-market trading Tuesday despite seeing a bounce last week that snapped the longest losing streak for stocks in over two decades, when it was just 0.3%. Futures tied to major indices like Nasdaq dropped 120 points or about 0.4%, which is not surprising given their recent performance over the past few months due to worries around global economic growth .

The recent upward trend in all three indexes has been positive, with weekly gains over 6%. This is making better progress after seven consecutive losing weeks for S&P 500 and Nasdaq as well eight torturous days for the Dow.

Crude oil futures charged higher on reports that Chinese authorities plan to end a two-month COVID lockdown in Shanghai and EU leaders agreed to stop purchases of crude from Russia. The WTI price rose 3.6% while Brent increased 3.7%.

Wall Street is getting a boost from positive earnings reports. The recent economic data has also helped alleviate concerns over inflation. Stocks are down for the year, but some strategists say they may not have reached rock bottom just yet.

“Last week’s strength will prove to be another bear market rally in the end,” said Morgan Stanley CIO Michael Wilson in a note.

Stocks have had a month filled with volatility as investors wait to see if inflation will continue its decades-long rise and what effect higher interest rates might have on the economy, especially with the interest rates pointing to a possible recession.

“The primary rationale ascribed to this particular rally beyond just an oversold bounce is that the Fed may be contemplating a pause in September,” Wilson said. He also added that “inflation remains too high for the Fed’s liking and so whatever pivot investors might be hoping for will be too immaterial to change the downtrend in equity prices.”

Investors are closely monitoring a plethora of key employment data this week, including the May jobs report due Friday.