San Francisco Fed President Mary Daly said in an Axio interview that further tightening will depend less on any single inflation shock than on whether AI demand, tariffs and higher energy costs persist or compound each other. Daly strongly defended September’s rate hike, saying she was “very pleased, very supportive” of the move and that it was “completely necessary” given rising inflation risks. But she also left open the possibility that no further action may be needed if those pressures prove temporary: “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.”
The greater concern is that the shocks last longer than expected or reinforce one another. Daly said a second round of tariff negotiations producing more tariffs would amount to “a second shock on top of a first shock,” extending the period over which inflation pressure persists. AI is increasingly part of that calculation. Daly said she sees AI-related price pressure “less as a one-off,” noting that demand for AI infrastructure is still rising and that relief from supply constraints could be “further out.” She also pointed to companies seeking forward contracts for memory chips and redesigning products to use fewer chips, calling this “a signal that there is a little bit of concern this is going to spread more broadly.”
That creates an awkward policy problem because the firms driving the largest AI spending boom may also be relatively insensitive to interest rates. Daly noted that “these hyperscalers aren’t very interest rate-sensitive,” although she still argued that tighter policy can restrain broader demand and inflation. Her reaction function therefore remains conditional: the Fed will watch whether these shocks fade, compound, or begin feeding underlying inflation momentum, while also keeping sight of the labor market. The message is not that more hikes are inevitable, but that persistent AI, tariff and energy shocks would make it harder for the Fed to treat today’s inflation pressure as temporary.
Key Takeaways
- Daly strongly backed September’s hike, calling it “completely necessary” as inflation risks increased.
- Further hikes are conditional, not predetermined. Daly said the Fed may not need more tightening if tariffs, oil and AI prove temporary.
- The bigger risk is that these shocks persist or compound, extending the period of elevated inflation.
- AI is becoming a more important inflation concern. Daly said she sees AI-related price pressure “less as a one-off” and warned that relief from supply constraints could take longer.
- Companies are already responding to potential chip shortages by securing forward contracts and redesigning products, suggesting the pressure may spread beyond data centers.
- Daly highlighted an unusual policy challenge: major AI hyperscalers are relatively insensitive to higher interest rates, even though tighter policy can still restrain broader demand.
- The Fed’s key test is whether current shocks fade, reinforce each other, or begin lifting underlying inflation momentum.
- Daly’s position remains more conditional than the view that policy is structurally too loose and must keep adjusting regardless of how the shocks evolve.
