San Francisco Fed president Mary Daly, speaking to Axios, outlined how overlapping inflation risks will shape her outlook for further rate hikes:
- AI-related supply pressures could last beyond the one-to-three-year period over which the Fed typically expects shocks to fade.
- Some businesses are securing future memory-chip supplies and redesigning products to reduce their reliance on chips.
- AI demand could compete for chips used in cars, appliances and other goods, spreading price pressures beyond data centers.
- Increasing reliance on borrowing could make those large technology companies more sensitive to financing costs.
- Believes tighter policy can restrain inflation even if the biggest AI spenders are relatively insensitive to interest rates.
- Supported September’s rate hike because inflation risks had increased.
- Further tightening may be unnecessary if tariffs, higher oil prices and AI-related pressures prove temporary.
- Another round of tariffs could create a second shock before the effects of the first have faded.
- The Fed will continue watching the labor market while assessing whether underlying inflation is gaining momentum.
Analysis
Daly supported the September hike, but she is not committing to another one. The distinction is whether these inflation shocks fade or keep feeding into prices. If energy pressures ease and tariff effects work through the system, she leaves room for the Fed to hold steady. If those pressures persist—or another shock comes along—additional tightening remains on the table.
The AI angle adds a complication. Higher rates can slow borrowing and spending, but they cannot quickly increase chip supplies. Meanwhile, the biggest AI spenders may keep investing even as other businesses feel the squeeze from higher financing costs. For traders, the message is conditional: easing supply pressures would strengthen the case for a pause. Broader price increases and stronger underlying inflation would strengthen the case for another hike.
Markets show little reaction to Daly’s comments
Markets are showing little reaction to Daly’s comments. Her conditional outlook gives traders little reason to materially change their policy expectations.
U.S. stocks remain higher, with the broader indices extending their gains and the broader indices on pace for record closes (S&P, Nasdaq composite and Nasdaq 100):
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Dow industrials: Up 353.04 points, or 0.69%, at 51,626.15.
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S&P 500: Up 63.48 points, or 0.82%, at 7,837.44.
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Nasdaq Composite: Up 201.53 points, or 0.73%, at 27,678.84.
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Nasdaq 100: Up 218.65 points, or 0.70%, at 31,295.09.
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Russell 2000: Down 3.16 points, or 0.11%, at 2,843.98.
Treasury yields are lower across the curve:
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2-year yield: 4.7954%, down 3.76 basis points.
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5-year yield: 5.0284%, down 3.76 basis points.
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10-year yield: 5.2709%, down 4.01 basis points.
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30-year yield: 5.6391%, down 2.49 basis points.
The combination of higher stocks and lower yields suggests traders are taking her comments in stride. Daly outlined the risks, but did not deliver a firm signal that another hike is needed. The next question remains whether those supply pressures ease or feed into more persistent inflation.
This article was written by Greg Michalowski at investinglive.com.