The Federal Reserve is simultaneously pushing forward significant adjustments on both monetary policy and bank supervision fronts.
San Francisco Fed President Mary Daly said she supports a September rate hike to address rising inflation risks, but whether further increases are needed will depend largely on whether the inflation shocks from tariffs, energy prices, and artificial intelligence (AI) investment prove temporary or persist and even compound.
Meanwhile, Fed Vice Chair for Supervision Michelle Bowman announced plans to restructure the U.S. bank supervision system and consider adjusting the asset-size thresholds that trigger stricter capital, liquidity, and stress-test requirements.
In an interview on Tuesday, Daly said that if the recent shocks to the U.S. economy—tariffs, oil price increases from Middle East conflicts, and the AI boom—are temporary in the traditional sense, meaning their effects emerge and then gradually fade, then the Fed may not need to keep raising rates.
She said she still sees a reasonable possibility of that scenario. However, if these factors compound or last longer than previously expected, the need for further monetary tightening could rise.
Daly specifically noted that if a new round of tariff negotiations leads to additional tariffs, it would amount to adding a new shock before the first round has fully faded, thereby prolonging the duration of price pressures.
Notably, Daly also listed AI as a potential inflation driver. She pointed out that AI-related chip demand is rising, which could further push up price pressures and make the current series of inflation shocks last even longer.
Daly is not a voting member of the Federal Open Market Committee (FOMC) this year, but she still participates in the Fed's routine monetary policy discussions. In September, the Fed raised its benchmark rate by 25 basis points to 3.75%-4.00%, the first hike in three years.
However, recent below-expectation inflation data and slowing job growth have significantly cooled market expectations for another rate hike in October. At the same time, U.S. services surveys show that corporate input cost pressures are still rising, with tariffs and fuel costs among the main problems facing corporate supply chains, making the Fed's next policy choice more complicated.
Beyond interest rate policy, the Fed is also preparing a large-scale overhaul of its bank supervision architecture. Bowman said on Tuesday that the Fed plans to redraw the bank supervision system into five geographic regions, each led by a "regional lead" responsible for coordinating all local bank supervision activities.
Specific examinations will still be carried out by staff at the regional reserve banks, but the new organizational structure will further clarify supervisory responsibilities and decision-making authority. Currently, the Fed's Washington headquarters sets bank examination policy, while actual supervision is carried out by the 12 regional reserve banks across the country.
Bowman believes the current system lacks a sufficiently clear link between "responsibility and accountability." She cited an independent review of the Silicon Valley Bank collapse, saying Fed supervisors failed to act in a timely manner at the time.
Bowman is expected to begin interviewing candidates for the new regional lead positions early next year. She also criticized the Fed's bank supervision process for over-relying on various committees, arguing that this mechanism not only slows decision-making but also tends to blur the division of responsibilities among staff when problems arise at banks.
She advocates streamlining the committee system so that supervisors can act faster on major risks that have already been identified. Since becoming the Fed's top bank supervision official in 2025, Bowman has replaced some supervision department heads, cut staff, and adjusted bank examination guidance, pushing supervisors to focus more on risks that could have a material financial impact rather than minor procedural issues.
At the same time, Bowman disclosed that the Fed plans to consider later this year adjusting the asset-size thresholds that determine when banks become subject to stricter supervision. The reform could involve raising thresholds currently set at fixed dollar amounts and establishing a mechanism to adjust them every five years based on inflation and economic growth.
This could give banks more room to expand assets without automatically triggering stricter capital, liquidity, and stress-test requirements simply because their size grows along with the economy. TD Cowen analyst Jaret Seiberg believes this adjustment direction is relatively favorable for large banks, because banks may no longer automatically fall into stricter prudential supervision solely because their asset size grows with overall economic expansion.
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