Overview
San Francisco Federal Reserve President Mary Daly addressed a Banco de España conference in Santander, Spain, stating that U.S. monetary policy is currently "slightly restrictive." She emphasized that uncertainty surrounding artificial‑intelligence‑related investment and labour‑market conditions makes the Fed’s next policy move unclear.
Policy Stance and Scenarios
Daly outlined two possible scenarios for policymakers. In the first, inflation proves more persistent than expected, requiring the Fed to act decisively to bring price growth back to the 2% target, which has remained above that level for six years. In the second scenario, economic growth may falter because investment slows; she noted that investors may be hesitant because they have not yet realised the gains from AI‑driven technologies. She described AI‑related investment growth as "exceedingly strong" and highlighted a still‑stable labour market as additional factors complicating the policy path.
Recent Economic Data
The U.S. Bureau of Labor Statistics released data on the same day showing that job growth slowed sharply in the most recent month. This slowdown was cited by Daly as a sign that the labour market, while stable, is showing signs of deceleration.
Market Reaction
Following the BLS release, traders reduced their bets on a Fed rate hike later in the month and in September, reflecting heightened uncertainty about the timing of the next policy move.
Additional Comments and Context
Daly’s remarks came after she participated in a global central‑banking conference in Sintra, Portugal, where Fed Chairman Kevin Warsh warned that he would "disappoint" anyone expecting the central bank to fail in containing inflation. Daly also pointed to the recent drop in oil prices after the Iran war ceasefire, describing it as positive for both the broader economy and consumers. She cautioned that the rapid evolution of AI technology warrants a careful, measured approach to interest‑rate decisions, stating, "You don’t want to react quickly when the world is changing quickly. You want to assess before you jump or act because you’ll make better decisions."