Fed's Daly: Next step for Fed is forward guidance

San Francisco Federal Reserve Bank President Mary Daly on Tuesday said now that the Fed has begun to taper its asset purchases, the next step is to tweak the communications the Fed gives about the future path of rate hikes.

Shre has said this in light of the market's reaction, most probably, to her colleagues today and in light of racing US Treasury yields and the greenback surging to fresh cycle highs. 

"It's this forward guidance piece that I'm currently looking at myself, to say, do we need to think about the forward guidance we have so that we get that better aligned with the way that we are seeing the economy evolve," Daly told reporters after an event at the Commonwealth Club in San Francisco. "That’s the next step in my judgment."

Fed's Daly, key comments

I have a strong bias to stick to current taper pace.

If we hadn't had delta, I'd be thinking about raising rates; but that's not where we are.

If inflation is still high once pandemic subsides, that's a different conversation.

After taper, the next step is forward guidance, to get that better aligned with the economic outlook.

Market implications

On Tuesday, US data showed US consumers looked past rising prices and drove Retail Sales higher than expected last month. This helped to fuel a big bid in the US dollar index, DXY:

DXY H1 chart

US Retail Sales rose 1.7% in October, topping consensus expectations of a 1.4% rise. Additionally, US Industrial Production lifted 1.6% in October which was considerably higher than expected. 

The greenback has been better bid ever since US inflation data last week surprised to the upside and showed consumer prices surged to their highest rate since 1990.

US yields rallied on Tuesday as investors now expected that the Federal Reserve will taper their QE programme at a faster pace.  More hawkishly, some observers even expect that the Fed could potentially hike interest rates sooner than first anticipated in the markets. Fed's James Bullard was an advocate of that overnight. He said that the US central bank should speed up its reduction of monetary stimulus in response to a surge in US inflation. 

US Dollar Index retreats from a new year-to-date high around 95.97, steady around 95.80s