Mary Daly, president of the Federal Reserve Bank of San Francisco, says inflation should come down. Daly says the central bank's policy is "slightly restrictive," which should help cool prices. "We continue to have policy in a slightly restrictive position, so inflation should come down," she said.
The current economic environment presents a unique challenge for the Fed. Tariffs and geopolitical strains have created supply-side disruptions, while the labor market is softening - a combination that historically looks like stagflation and demands careful monetary calibration. The recent ceasefire with Iran has provided some relief on oil prices, but tariff effects may linger, complicating the outlook.
Daly's outlook is tempered by the complex interplay of supply shocks and demand factors. The Fed's dual mandate of maximum employment and stable prices is being tested as the economy grapples with tariff-induced price pressures and a softening labor market. Historically, such stagflation-like conditions have required careful calibration of monetary policy to avoid recession while reining in inflation.
According to Daly, inflationary pressures this spring stemmed from tariffs and the spike in oil prices that accompanied the US military action in Iran. The easing of oil costs after the US-Iran ceasefire provides "a hope for relief," Daly said, though she cautioned that the economic trajectory remains uncertain.
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The Fed is also looking inward. Under recently appointed Chairman Kevin Warsh, the central bank has formed committees tasked with reviewing its operational methods and policy-making approaches, including the types of economic data it relies on. Daly said the central bank will not change its goals. "No, we're not moving the goal post, but we definitely will continue to study, modernize and do better tomorrow than we did today," she said.
If inflation stays high, the Fed might need to respond more aggressively. Daly described several possible economic outcomes, each potentially demanding a distinct policy reaction, and noted that the Fed might have to take more forceful action if inflation remains elevated. At its most recent meeting, the Fed held rates steady, though its accompanying projections revealed growing unease about the possibility of future rate increases.
The combination of persistent inflation and a slowing labor market creates a challenging environment for policymakers. While lower hiring could eventually reduce wage pressures, the recent tariff increases and volatile energy prices continue to pose upside risks. Daly's comments reflect the Fed's cautious stance as it balances the need to curb inflation without damaging economic growth.
With the ceasefire in place, oil costs have moderated, but tariff effects could persist. June saw a sharp slowdown in hiring, and the leisure and hospitality sector experienced its largest decline since 2020, which could eventually ease wage pressures but also raises the risk of recession.
Historical Context Matters: The Fed has faced similar dilemmas before. In the late 1970s, supply shocks from oil and food prices combined with a slowing economy forced the central bank to raise rates aggressively, triggering a deep recession. Today's environment is not identical - inflation is lower and the labor market, while softening, remains relatively resilient - but the policy challenge is reminiscent. Daly's cautious tone reflects a desire to avoid repeating past mistakes while ensuring that inflation expectations remain anchored.
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