Fed's Daly Says Tariff Impact on Inflation Beginning to Fade
Key Takeaways
- •San Francisco Fed President Mary Daly reported that tariff-driven inflationary pressures are beginning to ease, though they have not fully dissipated.
- •Daly stated that an end to the Middle East conflict would likely help lower inflation, citing energy market stability through the Strait of Hormuz as a key factor.
- •Heavy capital spending on artificial intelligence and related technology infrastructure is showing up as a measurable driver of inflation in Fed data, a relatively new theme in central bank commentary.
- •Inflation has declined significantly from its 2022 peaks but remains short of the Federal Reserve's 2 percent objective, leaving policymakers evaluating whether current rates are sufficiently restrictive.
- •Daly's balanced tone on fading tariff pressures and remaining inflation drivers may strengthen expectations that the Fed will hold steady on rates rather than raise them further.
Federal Reserve Bank of San Francisco President Mary Daly said tariffs have had a clear impact on inflation, though she pointed to early signs that those effects are beginning to ease.
Daly's remarks come amid a broader set of comments from Fed officials this week on the various forces shaping the inflation outlook. She said there is some evidence that the tariff-driven pressure on prices is starting to fade, a development that, if sustained, could ease one of the factors that has kept inflation elevated relative to the Fed's 2 percent target. Inflation has cooled meaningfully from its 2022 peaks but has yet to fully converge with that goal, leaving policymakers weighing whether current interest rate levels are sufficiently restrictive.
Daly also linked the inflation outlook to the ongoing conflict in the Middle East, stating that if the war were to end, it should help bring inflation lower. Her comments underscore how closely Fed officials are monitoring geopolitical developments, including negotiations over reopening the Strait of Hormuz, a chokepoint through which roughly a fifth of global oil consumption routinely flows. Any disruption or stabilization there has direct bearing on energy prices and, by extension, broader price stability.
At the same time, Daly highlighted a less commonly discussed driver of inflation, saying technology investment is helping push prices higher. Her remarks point to a growing recognition among Fed officials that heavy capital spending tied to artificial intelligence and related technology infrastructure is showing up as a measurable factor in inflation data, adding a new dimension to the debate over what is driving prices beyond more traditional factors like tariffs and energy costs.
Daly's observations on technology investment as an inflation driver are a relatively novel addition to Fed commentary, drawing attention to how AI-related capital expenditure may be feeding into price metrics — an angle that resonates with ongoing debate over how AI-linked categories are affecting core PCE readings, the Fed's preferred inflation gauge.
Her acknowledgment that tariff-driven price pressures are fading, combined with her emphasis on remaining swing factors, adds a more balanced tone to recent Fed commentary, a nuance that could reinforce expectations for the Fed to remain patient rather than shift toward further rate hikes.
Earlier: Fed's Cook: Fed running out of room for disinflation to return
