FED'S DALY: WHEN YOU STEP BACK FROM 'PAINFUL' VOLATILITY, THIS IS THE KIND OF REBALANCING THAT YOU WOULD HOPE FOR

San Francisco Fed President Mary Daly characterized recent market volatility as painful but said the resulting rebalancing is the kind of adjustment policymakers would hope to see, implying that the repricing has so far been orderly rather than disruptive to the broader economy. The transmission channel here runs through financial conditions: a sharp repricing of rate expectations and risk assets tightens conditions on its own, and Daly's framing suggests Fed officials view that tightening as acceptable if it is working through valuations and positioning rather than through a sudden credit or liquidity shock. Rate-sensitive assets, including long-duration Treasuries, growth equities, and rate-sensitive credit, are most exposed because their pricing depends heavily on the path of policy expectations, while the dollar and front-end yields would react to any shift in perceived Fed tolerance for further tightening. Traders will be watching the next CPI print and the upcoming Fed communications calendar for confirmation of whether the Fed sees the current volatility as consistent with its inflation and employment objectives.

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