Fed's Daly Warns Against Prolonged High Rates, Signals Policy Flexibility

This analysis is based on the Bloomberg interview [3] with Federal Reserve Bank of San Francisco President Mary Daly published on November 10, 2025, where she discussed monetary policy assessment and economic outlook.

Mary Daly’s comments represent a significant shift in Federal Reserve communication, suggesting growing concern about the economic costs of prolonged high interest rates. While maintaining her focus on inflation and productivity as key policy guides, Daly specifically warned against “keeping interest rates too high for too long” [1][2]. This stance indicates potential divergence within the Fed about the appropriate pace and timing of rate adjustments.

The market responded positively to Daly’s comments, with the S&P 500 gaining 0.69% and NASDAQ increasing 0.74% on November 10 [0], reflecting investor optimism about potential policy easing. However, this enthusiasm may be premature given ongoing economic uncertainties.

Daly’s assessment that she doesn’t see rising inflation in services, housing, or inflation expectations suggests room for policy flexibility [1]. This observation, combined with her reference to historical parallels between the 1970s and 1990s, indicates she may be advocating for a more balanced approach that considers both inflation control and economic growth sustainability.

Daly’s warning against prolonged high rates suggests potential disagreement within the Federal Reserve about monetary policy direction. Her “open mind” approach to December policy decisions [2] contrasts with more hawkish positions that may prioritize inflation control over growth concerns.

The ongoing government shutdown has limited economic data availability, making policy decisions more challenging [1]. This information gap increases the likelihood of unexpected policy moves and heightens market uncertainty.

Daly’s reference to 1970s and 1990s parallels indicates she’s considering past monetary policy lessons, particularly regarding the costs of overtightening versus the benefits of preemptive action against inflation.

The strong positive market reaction to Daly’s comments reveals heightened sensitivity to Fed communication, potentially creating volatility if future data doesn’t support the market’s rate cut expectations.

Investors should be aware that Daly’s comments suggest potential divergence within the Fed about appropriate policy timing. Her warning against “holding rates too high for too long” indicates growing concern about economic growth impacts [1].

The positive market reaction may reflect premature optimism about potential rate cuts. If upcoming inflation data doesn’t support policy easing, markets could face sharp corrections.

Limited economic data availability due to the government shutdown increases the likelihood of unexpected policy moves and heightens market volatility [1].

Rate-sensitive sectors including banking, real estate, and utilities may benefit from the current policy uncertainty if the Fed moves toward more accommodative positioning.

Focus on upcoming inflation and productivity metrics, which Daly specifically mentioned as key factors in her policy assessment framework [1][2].

Daly’s November 10, 2025 interview revealed her balanced approach to monetary policy, emphasizing the need to avoid prolonged high rates while maintaining vigilance on inflation and productivity [1][2][3]. She noted concerning trends in services and housing inflation are not currently evident, suggesting potential policy flexibility. Her “open mind” stance toward December decisions indicates willingness to adjust policy based on incoming data. The market’s positive reaction reflects growing expectations for policy easing, though this optimism may be premature given data constraints and potential Fed internal disagreements. Investors should monitor upcoming inflation reports, productivity metrics, and other Fed officials’ statements for clearer policy direction signals.