Federal Reserve policymaker Mary Daly said the need for additional interest-rate hikes will depend heavily on whether the inflationary shocks affecting the U.S. economy prove temporary or become more persistent. Her comments highlight the challenge facing the Fed as tariffs, higher oil prices linked to the Middle East conflict and developments surrounding artificial intelligence create uncertainty around the inflation outlook.

Daly Supports September Rate Increase

Daly, president of the San Francisco Federal Reserve, said she supported the Fed’s decision to raise interest rates in September in response to rising inflation risks. However, she indicated that the September move should not necessarily be viewed as evidence that a prolonged sequence of additional rate increases is already determined.

Her assessment instead places significant weight on how the underlying shocks develop. If the factors pushing inflation higher behave like conventional economic shocks that emerge, have an effect and then fade, the Fed may not need to deliver additional increases. Daly said she continues to assign some probability to that outcome, suggesting that policymakers still have room to assess incoming data before determining the next phase of monetary policy.

Multiple Shocks Could Extend Inflation Pressure

The greater concern would arise if the shocks persist or begin to reinforce one another. Daly identified tariffs, Middle East-related oil prices and AI as important factors that could influence the inflation trajectory. While each shock may initially appear manageable, their combined or prolonged effects could make it more difficult for inflation to return to the Fed’s desired path.

Tariff policy represents a particular source of uncertainty. Daly noted that another round of tariff negotiations resulting in additional tariffs could effectively create a second inflationary shock on top of the first. Such an outcome would potentially extend the period over which higher prices filter through the economy, increasing the challenge for monetary policymakers.

Fed Faces Difficult Balance Between Inflation and Growth

The policy dilemma extends beyond inflation itself. If price pressures prove temporary, maintaining a restrictive monetary stance for too long could unnecessarily weigh on economic activity. Conversely, if inflationary pressures become persistent, easing policy prematurely could allow inflation expectations and broader price pressures to become more entrenched.

This makes the distinction between temporary and persistent inflation shocks increasingly important for financial markets. Investors will be assessing economic data not only for the direction of inflation but also for evidence about how quickly individual shocks are passing through to businesses, consumers and broader pricing behavior.

What Markets Will Watch Next

Daly’s comments leave the path for further rate increases dependent on developments rather than a predetermined policy sequence. The Federal Reserve will need to evaluate whether tariffs generate additional price pressures, whether oil prices remain elevated because of geopolitical risks and whether AI-related developments produce inflationary effects that persist beyond initial expectations.

For global investors, the evolving inflation picture remains central to expectations for U.S. interest rates, Treasury yields, currency markets and broader asset valuations. The key signal in the coming months will be whether the shocks begin to fade individually or instead compound, potentially keeping inflation elevated for longer and requiring the Fed to maintain a more restrictive monetary stance.