San Francisco Federal Reserve President Mary Daly said she is growing increasingly worried about the persistence of inflation and is no longer as confident that the central bank can wait for repeated supply shocks to fade on their own.
Daly said her view has "absolutely" changed compared with six months ago, when she leaned toward the traditional central bank approach of "looking through" inflation caused by disruptions to the supply of goods or services. Central banks fight inflation by raising interest rates, which dampens demand but cannot address supply-side problems.
"The traditional rule of thumb is that our tools don't work on supply shocks, and those shocks fade on their own. But does that really still hold when shocks pile on top of each other and last a long time?" Daly said on the Hoover Institution's Economics, Applied podcast. "When inflation stays elevated for a sustained period, at what point do what were one-time shocks start to seep into inflation expectations?"
Fed officials unanimously supported a 25 basis point rate hike on September 16, the first increase since 2023. Rate projections released at that meeting showed most policymakers expect another 25 basis point hike by the end of 2026.
Daly said that before the September meeting, she had already begun to worry about market-based measures of long-term inflation expectations. "Market investors are demanding higher compensation because of inflation concerns," she said. "It has been rising since the July meeting. In my view, this is a worrying early sign that you could see more of this."
She also said businesses in her district are more willing to pass on higher costs to consumers. "Right now the inflation risk is entirely skewed to the upside," she said.
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