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San Francisco Federal Reserve President Mary Daly said the Federal Reserve remains in a difficult position as it weighs the next move on interest rates, citing persistent inflation risks, a resilient labor market, and the uncertain economic impact of artificial intelligence.
Speaking at a Banco de España conference in Santander, Spain, on Thursday, Daly described current U.S. monetary policy as "slightly restrictive" but emphasized that the outlook remains highly uncertain. She said the rapid expansion of AI-related investment and steady employment conditions make it challenging to determine whether the Fed should adjust policy in the coming months.
Daly noted there are competing economic scenarios the central bank must consider. Inflation could remain stubbornly high, requiring policymakers to keep fighting price pressures. At the same time, economic growth could weaken if business investment slows as companies wait to see stronger returns from AI-related spending.
She added that the recent decline in oil prices following the Iran ceasefire is a positive development for both consumers and the broader U.S. economy, potentially easing some inflationary pressure.
Her comments came shortly after the U.S. Bureau of Labor Statistics reported that job growth slowed sharply last month. Following the data release, financial markets scaled back expectations for a Federal Reserve interest rate increase later this month and reduced the likelihood of another rate hike in September.
Daly also referenced discussions at the European Central Bank's annual conference in Sintra, Portugal, where Federal Reserve Chair Kevin Warsh reiterated the central bank's commitment to bringing inflation back to its 2% target. Warsh said AI is already reshaping the economy by boosting demand in the near term while eventually increasing supply, creating opposing effects on inflation.
According to Daly, the uncertainty surrounding AI's long-term influence is a key reason for the Fed to remain patient.
"When the world is changing quickly, you don't want to react too quickly," Daly said, stressing that carefully evaluating incoming economic data will help the Federal Reserve make better policy decisions.
