Strong US data and geopolitical risks keep Federal Reserve cautious on interest rate cuts

The Federal Reserve is facing a tricky mix of stronger-than-expected U.S. economic data and rising geopolitical uncertainty, and Morgan Stanley strategist Andrew Sheets said policymakers may still be inclined to keep rates elevated if inflation pressures do not ease. At the same time, San Francisco Fed President Mary Daly said the central bank is in a “good place” but is not ready to give a clear signal on where rates are headed because the outlook remains unusually uncertain.

Speaking on Bloomberg Surveillance, Sheets said the Fed is likely to look through the inflationary impact of the Iran war and focus instead on broader, more persistent price pressures if officials begin considering another rate increase. That view suggests the central bank could treat conflict-related energy or supply shocks as temporary unless they threaten to keep inflation elevated more broadly.

Daly struck a more cautious tone in comments reported by Bloomberg, saying monetary policy is currently well positioned but that there is “too much uncertainty in the economy” to predict the next move with confidence. Her remarks reflect the Fed’s broader dilemma: policymakers want to avoid easing too soon if inflation proves sticky, but they also do not want to overreact to short-term disturbances.

The debate comes as markets reassess the path of rates after better-than-expected jobs data and other economic reports, which have reduced expectations for aggressive cuts this year. In earlier remarks highlighted in Bloomberg video coverage, Sheets said the Fed still had “more to go” on rates and warned that upcoming inflation readings, especially core measures, would be critical in determining whether policymakers stay restrictive longer.

What happens next will depend largely on the next run of inflation, labor-market, and growth data. If price pressures keep cooling, the Fed could eventually begin easing; if they do not, officials may keep rates higher for longer or even revisit the case for further tightening. For households and businesses, that means borrowing costs, mortgage rates, and credit conditions are likely to remain highly sensitive to the next few data releases and any signs that geopolitical shocks are feeding into broader inflation.