• Shelter inflation continues to moderate, offering relief to the Fed's inflation battle.
  • Cooling rent growth and rising housing inventory signal a more balanced market.
  • Daly's remarks reinforce expectations for gradual monetary policy normalization.

Shelter Costs Ease

San Francisco Fed President Mary Daly said Thursday that housing inflation in the U.S. has been declining, a development that supports the central bank's efforts to bring overall price pressures under control. Speaking at an event in San Francisco, Daly noted that the moderation in shelter costs is a welcome sign, though she cautioned that the path ahead remains uncertain.

"Housing inflation has been coming down," Daly said, according to a transcript of her remarks. She pointed to slowing rent growth and improving supply conditions as key factors behind the trend.

Market Signals

Nationwide, rent growth has decelerated from pandemic-era highs, with vacancy rates rising in many metropolitan areas. Home price appreciation has also cooled, with the S&P CoreLogic Case-Shiller index showing annual gains slowing to near-historic lows. At the same time, housing inventory has increased, particularly in the Sun Belt, where a wave of new construction has come online. These dynamics are expected to put further downward pressure on shelter costs in the coming months.

Policy Implications

Daly’s comments align with market expectations for the Fed to begin cutting interest rates later this year. Investors are pricing in a rate cut as soon as March 2026, according to CME FedWatch, though officials have stressed that decisions will be data-dependent.

"We need to see continued progress," Daly said, noting that while housing inflation is easing, other components of inflation, such as services, remain sticky. She added that the labor market remains strong, giving the Fed room to be patient.

Broader Impact

Cooling shelter costs could provide meaningful relief to American households, who have faced soaring rents and home prices for years. Real wages are already rising, and slower housing inflation would boost purchasing power further. However, the effects are uneven: renters in high-demand coastal cities still face scarce affordable options, while homeowners in some markets have seen equity gains slow.

For investors, the moderation in housing inflation supports a narrative of normalization in the broader economy. Homebuilder stocks have rallied this year on hopes of lower mortgage rates, while real estate investment trusts focused on rental housing have seen mixed performance.

Daly did not speculate on the exact timing of rate cuts, but emphasized that the Fed is "not in a hurry" and will monitor data closely.

Correction: A previous version of this article mischaracterized Daly's timeline for rate cuts. She did not specify a timeframe.