San Francisco Fed’s Daly Says Rates May Need to Rise More Aggressively if Inflation Broadens

Mary Daly, president of the Federal Reserve Bank of San Francisco, warned that the Federal Reserve may need to raise interest rates more aggressively if inflation spreads more broadly across the economy.

Speaking at an event in Tokyo, Daly said she fully supported the Federal Open Market Committee’s decision in July to hold rates steady. She also said policymakers need to be prepared for a scenario in which inflation becomes more widespread, Bloomberg reported on August 6.

Daly outlined two possible paths for prices. In the first, inflation shocks from tariffs, higher oil prices and increased investment in artificial intelligence prove temporary and fade over time. In that case, the Fed could keep rates at current levels.

In the second scenario, price pressures tied to tariffs, rising energy costs and heavier AI investment spread throughout the economy, making inflation more persistent. She said that possibility is becoming more likely.

“If the second scenario becomes reality, it would raise questions about why we should respond gradually,” Daly said. “In that case, it may be appropriate to adjust policy as quickly as possible.”

Daly added that long-term inflation expectations remain stable for now. But if those expectations start rising again, the Fed’s effort to restore price stability could become more difficult.