Mary Daly, president of the Federal Reserve Bank of San Francisco, said the Federal Reserve may need to raise interest rates further to bring inflation under control, even as she acknowledged that the timing and pace of any future decisions remain unclear.

“My expectation is, we’re going to have to tighten policy further. […] More is likely to be needed, and certainly … I’m prepared to do that if that’s what the economy calls for,” Daly said.

Pointing to current market turbulence, she also urged a cautious approach — one that relies on fresh data and a measured, step-by-step progression.

Daly insists that the real economic issue is persistent inflation

Daly warned that the Fed cannot back down on inflation after so many months of high prices. Fortunately, she noted, a strong labor market will allow the central bank to focus entirely on price stability. According to the Bureau of Labor Statistics, the US added 165,000 jobs in October, a figure well above Wall Street’s expectations. For perspective, the economy added almost triple the number of jobs the Dow Jones estimate called for.

Daly considers the recent hiring numbers a positive sign; however, she pointed out that paychecks are not growing fast enough to offset inflation. Hourly pay rose roughly 3.1% annually last month, falling short of September’s 3.7% consumer price index reading.

“The job market remains stable and solid, but not booming, and you see real wages falling because those wages are not really keeping up with inflation. I think that’s the crux of this. Good news on the jobs front, not so clear that Americans are going to gain ground in the labor market,” Daly said.

The gap between wage growth and inflation underscores the pressure American households face: when consumer prices rise faster than earnings, workers lose purchasing power even when they are employed and receive salary increases. That leaves less money in the household after paying for food, housing, transportation, and utilities.

For the Fed, persistent inflation is a difficult policy problem. Higher interest rates make borrowing more expensive, so consumers and businesses may be less willing to spend or invest. In time, weaker demand will ease price pressure, but tighter monetary policy also slows economic activity and makes it harder for businesses to expand or hire additional workers.

In her interview, the San Francisco Fed chief also endorsed the central bank’s recent track record, particularly the September rate hike and the October pause, as the right calls. Nevertheless, she made clear that she is ready to raise rates again if that is what the economy needs.

Daly: AI stock correction painful but orderly

On tech stocks, Daly admitted the ongoing shift in AI valuations has been painful for investors but has not turned chaotic. Even if the AI cooldown drags growth down slightly, she said she is not worried about a deep recession.

The AI-related stock sell-off has added another layer of uncertainty to the economic outlook. Investors have increasingly asked whether the money being spent on artificial intelligence infrastructure will generate returns fast enough to justify today’s valuations. Daly called the market correction painful but orderly — suggesting she does not see it as an immediate threat to financial stability.

She added that a modest slowdown in AI investment would not necessarily lead to a recession. The developments nonetheless remain relevant to policymakers as they assess business investment, financial conditions, and the overall outlook for economic growth.

Policy backdrop and 2026 vote

Daly is set to vote on policy decisions next year. Under the committee’s structure, the twelve voting seats on the rate-setting Federal Open Market Committee include the Fed’s Board of Governors, the president of the New York Fed, and four regional Bank presidents whose voting turns rotate on an annual schedule — a setup that gives extra weight to the views of presidents like Daly in the years they hold a vote. In September, the Federal Open Market Committee raised the central bank’s benchmark interest rate by 25 basis points — a quarter of a percentage point — establishing a new target range of 3.75% to 4%, per the Federal Reserve’s meeting calendar.

Other Fed leaders support rate hikes

St. Louis Fed President Alberto Musalem similarly warned that inflation remains the biggest economic hurdle. Speaking to Midwestern business executives, he called inflation a “regressive tax” that harms the economy, adding that cooling prices quickly is the best strategy for boosting growth and jobs.

Musalem will not vote on the FOMC this year, but he has made clear that he supports lifting interest rates higher. The Fed ultimately left its benchmark rate unchanged at the October session, but pressure is mounting in markets for another rate hike at the upcoming December 8–9 meeting. With Daly framing the committee’s path as dependent on fresh data, the labor market and inflation reports released between now and that session are set to draw close scrutiny from investors and policymakers alike.

Cleveland Fed President Beth Hammack also suggested that further rate hikes could be required to tame inflation, though she advocates a cautious approach, favoring small, incremental policy steps.

Richmond Fed President Thomas Barkin, speaking more recently, likewise said he sees higher rates on the horizon but is not sure about the exact timing.