During an appearance in Tokyo, Mary Daly, the head of the Federal Reserve Bank of San Francisco, expressed full backing for the Fed's recent decision to keep interest rates unchanged in July. However, her remarks carried a strong caution that rising inflation could be more than a passing concern.
Daly outlined two distinct possibilities for where inflation might go. In one scenario, she expects price pressures to gradually ease. In the other, she sees a risk of ongoing inflation becoming deeply entrenched. In either case, she stressed the need for the Fed to remain ready to respond. “The answer there is be vigilant,” she said. “But be prepared to take action.”
Two Scenarios and a Fed Divided
Daly described the first path as one in which inflation remains short-term. In that case, the Fed could continue to maintain the current interest rate levels. The second scenario, however, is more troubling. Tariffs, oil price increases, and sustained investment in artificial intelligence could mix together, leading to a broader and more persistent inflation problem.
The Fed is not speaking with one voice on how to handle inflation. Daly belongs to a group of officials who believe recent inflation spikes will eventually fade on their own. Others argue that those effects are already spreading to other areas of the economy, making them more difficult to control.
Daly urged fellow policymakers to closely track the data in the coming weeks. If the more concerning scenario begins to play out, she said, the Fed may need to act decisively with significant interest rate hikes. “Why do it incrementally?” she asked, suggesting a bolder, faster response could be necessary.
She also highlighted the importance of long-term inflation expectations. While they remain stable now, if they begin to rise again, as they did following the inflation spike in 2022, it could create new challenges for the Fed in returning to a normal policy environment.
Daly’s comments come at a time when the Fed remains divided over inflation risks and the best course of action. Last week, the central bank decided to hold interest rates steady, with three policymakers dissenting. They wanted to increase rates by a quarter percentage point, showing the ongoing disagreement within the organization.
Though Daly is not currently a voting member of the Federal Open Market Committee, she still plays a key role in policy discussions. She emphasized that regardless of the scenario the Fed is facing, careful preparation and responsiveness are essential to maintaining economic stability.