Fed’s Daly expects further rate hikes, warning that AI is fuelling inflation

AI has undoubtedly added to price pressures while “having limited impact on the labour market.” That was the assessment of San Francisco Federal Reserve (Fed) President Mary Daly.

The prevailing policy bias is that “further tightening will be needed,” Daly said in a keynote address at the Stanford Institute for Economic Policy Research, highlighting the risk of AI contributing to inflation. With inflation spreading to services, she added that “inflation pressure is up, not down”.

What were Daly’s main observations?

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

The technology boom is powering the economy

A deep AI pipeline means activity will continue even if it slows

There is no question that AI has added to price pressures

Only a modest share of inflation comes directly from AI

The labour market impact of AI remains limited

We face an inflation problem, though AI is not the main driver

AI’s contribution to inflation could increase

AI valuations have been repriced, without an unwinding of interest or enthusiasm

This suggests growth is not at risk

Productivity growth has positive momentum

Work under way could deliver stronger productivity growth over the next 1-3 years

When AI will affect productivity remains too early to determine

High inflation accompanies a stable labour market, positive growth and rising productivity

Reducing inflation must remain our focus

The need to tackle inflation now should not lead us to overlook productivity growth’s potential to bring inflation down

We cannot afford complacency, as inflation shocks can compound

The policy bias points to a need for additional tightening

Price pressures are spreading to services, where inflation becomes sticky once it rises

I am comfortable with a September rate hike; additional tightening is necessary

Price pressures are increasing rather than easing

More and more firms tell me they intend to pass on higher costs

Price stability is the Fed’s responsibility; markets cannot do its work

Where financial markets stand is consistent with where the Fed needs to be

We have more time for decisions when financial conditions are tighter

We do not need to decide now precisely how much the Fed should tighten or when

We have many quarters ahead in which to take policy decisions

How Is the US Dollar Performing Today?

The US Dollar recorded its strongest performance against the Australian Dollar today. Percentage changes in the US Dollar (USD) against the major currencies listed are shown in the table below.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.33%	0.33%	-0.05%	0.04%	0.64%	0.33%	0.32%
EUR	-0.33%		0.00%	-0.37%	-0.29%	0.32%	-0.00%	-0.02%
GBP	-0.33%	-0.01%		-0.36%	-0.28%	0.32%	-0.00%	-0.02%
JPY	0.05%	0.37%	0.36%		0.08%	0.68%	0.36%	0.36%
CAD	-0.04%	0.29%	0.28%	-0.08%		0.60%	0.29%	0.28%
AUD	-0.64%	-0.32%	-0.32%	-0.68%	-0.60%		-0.30%	-0.32%
NZD	-0.33%	0.00%	0.00%	-0.36%	-0.29%	0.30%		0.00%
CHF	-0.32%	0.02%	0.02%	-0.36%	-0.28%	0.32%	-0.00%

Percentage movements between the major currencies are displayed in the heat map. Choose the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following its row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

Fed: Common Questions Answered

How does the Federal Reserve’s role influence the US Dollar?

The Federal Reserve (Fed) sets US monetary policy with a dual mandate: maintaining price stability and promoting full employment. Interest rate adjustments are its main means of meeting these objectives. If prices climb too rapidly and inflation exceeds its 2% target, the Fed increases interest rates. Higher borrowing costs across the economy make the US a more attractive destination for international investment, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut rates to stimulate borrowing. This puts pressure on the Greenback.

What is the Fed’s monetary policy meeting schedule?

At the Federal Reserve’s (Fed) eight annual policy meetings, economic conditions are reviewed and monetary policy decisions taken by the Federal Open Market Committee (FOMC). Twelve Fed officials attend the FOMC: the Board of Governors’ seven members, the president of the Federal Reserve Bank of New York and four of the other eleven regional Reserve Bank presidents. These four presidents rotate through one-year terms.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When circumstances are extreme, the Federal Reserve may turn to Quantitative Easing (QE) to substantially expand the flow of credit through a financial system that has stalled. This unconventional policy is used in crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred tool. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions, a process that typically weakens the US Dollar.

How does Quantitative Tightening (QT) work, and why does it affect the US Dollar?

As the opposite of QE, Quantitative Tightening (QT) involves the Federal Reserve halting bond purchases from financial institutions. It also leaves the principal from its maturing bond holdings unreinvested rather than using it to buy new bonds. The process generally supports the US Dollar’s value.