Fed's Daly: Future Rate Hikes Depend on Whether Economic Shocks Persist

San Francisco Federal Reserve President Mary Daly signaled that the necessity for further interest rate hikes will depend on whether recent inflationary pressures, such as AI demand and geopolitical tensions, prove to be transitory or persistent. Her comments highlight the debate among policymakers regarding the durability of current economic disruptions.

"If the shocks that we've experienced, tariffs, oil prices from the Middle East conflict, and then AI, if they prove to be conventional shocks where they come, they go, and they have temporary effects, then we may not need more. And I still have some probability on that," said Mary Daly, President of the San Francisco Federal Reserve, in a Reuters report.

The Mechanics of Inflationary Shocks

Daly identified primary drivers currently influencing the Federal Reserve's policy outlook: trade tariffs, volatile energy prices stemming from Middle East conflicts, and the expansion of artificial intelligence. While these factors can create price spikes, their long-term impact on the economy remains under central bank scrutiny.

Regarding the potential for these shocks to compound, Daly noted that the timing and duration of these events remain critical variables.

"But if they either compound each other or they just simply last longer than we had forecast that they would. If we have a second round of tariff negotiations that result in more tariffs, then that would be a second shock on top of a first shock. That would extend the period of time over which those shocks would play out," Daly said.

AI Demand as a Variable

A notable element of Daly's assessment is the role of artificial intelligence. She pointed to the surging demand for semiconductors and related computing hardware as a potential source of inflationary pressure. In her view, if such demand remains elevated, it could exacerbate the impact of other economic shocks, preventing inflation from returning to the Federal Reserve's target range as quickly as anticipated.

Policy Context and Committee Participation

While Daly's perspectives offer insight into the internal deliberations of the Federal Reserve, she does not hold a voting seat on the Federal Open Market Committee for the 2026 calendar year.

This distinction is relevant for market participants monitoring the central bank's path, as voting power rotates annually among regional Fed bank presidents. Despite her lack of a vote this year, her analysis reflects the framework used by the system to evaluate how exogenous supply-side shocks influence monetary policy decisions.