Fed's Daly: There is a scenario where Fed has to fight inflation

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While speaking at a Banco de España conference in Santander, Spain, San Francisco Federal Reserve President Mary Daly said that she doesn't see any signs of a lack of economic resiliency in the US, despite above-target inflation, per Reuters.

Key takeaways

"AI investment shock has people wondering if it will be inflationary."

"If central bank acts too quickly it could prematurely bridle things, if you act too slowly it could be unwelcome for citizens."

"We are in early stages of a potential exponential rise in productivity gains from AI."

"In US there's exceedingly strong investment growth."

"Labor market is stabilized."

"Inflation has risen on tariffs, oil price shock."

"Oil prices have come down, hope for relief."

"US monetary policy is slightly restrictive."

"That should help inflaiton come down."

"There is a scenario where Fed has to fight inflation."

"There's also a scenario where growth doesn't continue."

"Can't decide right now, can't give false guidance on rates."

"If Strait of Hormuz situation is resolved that would be a good thing."

"Oil back down is good news for consumers and economy."

"Housing inflation has been coming down in US."

Daly flags AI productivity upside while keeping inflation fight options open

Daly’s remarks strike a cautiously balanced tone, with the FXS Speechtracker score at 6/10 modestly above the 5.7/10 historical average, signaling slightly firmer conviction but not a clear hawkish pivot relative to the historical average. The focus on an “AI investment shock” and the “early stages of a potential exponential rise in productivity gains from AI” frames technology as a potential disinflationary force over time, while warning that acting too quickly or too slowly on policy could either choke off growth or leave citizens exposed to persistent price pressures. Daly underscores strong U.S. investment, a stabilized labor market, and ongoing economic resiliency despite above-target inflation, but stresses uncertainty around future scenarios and refuses to offer false guidance on rates, keeping the Dollar sensitive to incoming data and geopolitical risks such as the Strait of Hormuz.

The FXS Fed Sentiment Index edged up by 0.25 points to 123.89, reinforcing that the overall policy backdrop remains firmly in hawkish territory despite Daly’s emphasis on two-sided risks. The small uptick, combined with a Speechtracker score slightly above the established baseline, suggests markets will continue to price a Fed that is prepared to fight inflation if needed, even as potential AI-driven productivity gains and easing Oil prices offer a path to lower inflation without aggressive tightening.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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