Fed’s Daly Supported Rate Decision, Warns of Inflation Risks

(Bloomberg) — Federal Reserve Bank of San Francisco President Mary Daly said she supported the central bank’s decision to keep interest rates on hold last week, but warned of the possibility that high inflation is a broader problem that could require more aggressive action from policymakers.

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“I was completely supportive of the decision to hold rates in July,” Daly said Wednesday at an event in Tokyo.

The San Francisco Fed chief said she sees two potential scenarios for inflation — one where it starts to cool and a second in which more persistent price pressures take hold — that would require different policy actions.

“The answer there is be vigilant to watch the information as it comes in, but be very prepared to take the action,” she said.

Fed officials voted last week to keep interest rates unchanged, though three policymakers dissented because they wanted to raise rates by a quarter percentage point. Daly is not a voter on the rate-setting Federal Open Market Committee this year, though she participates in the policy deliberations.

Fed officials have been divided over the risks from inflation pressures, and how to deal with them. Some, like Daly, still see the shocks from tariffs, the oil-price surge and the artificial intelligence boom as likely to be isolated and eventually dissipate. Others see evidence that inflation in those areas has already broadened to other parts of the economy.

Two Scenarios

In her remarks, Daly outlined two potential scenarios for the inflation path. In the first, which Daly said she still sees as most likely, inflation is short lived and the Fed can keep holding interest rates where they are.

But a second possibility — that price increases from tariffs, higher energy costs and continued AI investment are compounded — is becoming increasingly likely, she warned. Inflation would then become more broad based and persistent, requiring more aggressive action from the Fed.

Daly said policymakers should carefully monitor the likelihood of the second scenario, and watch incoming data carefully over the coming weeks.

“If we find that scenario two is taking hold then I think the question would be, ‘why do it incrementally?'” she said, referring to possible rate increases, adding that it might be best in that case to adjust policy as quickly as possible.