Fed's Daly: Some signs tariff impact on inflation starting to fade
Federal Reserve (Fed) Bank of San Francisco President Mary Daly said on Thursday that tariffs have had a clear impact on inflation, though she pointed to early signs that effect is beginning to ease.
Key quotes
Tariffs had obvious effect on inflation.
Some signs tariff impact on inflation starting to fade.
Middle East war ending should ease inflation pressures.
Technology spending is pushing inflation higher.
Many expect supply shocks to trigger temporary inflation surge.
'Good reasons' to expect supply shocks won't cause lasting inflation impact.
Job market unlikely to spark significant inflation pressure.
Longer-term inflation expectations remain firmly anchored.
Stable inflation expectations should not be taken for granted.
Market reaction
As of writing, the US Dollar Index (DXY) trades 0.02% lower to near 99.68.
Daly flags fading tariff impact but warns on tech-driven inflation
Fed's Daly delivered a nuanced assessment of inflation drivers, with the FXS Speechtracker score at 5.4/10, slightly softer relative to the historical average of 5.6/10, signaling a modestly less hawkish tone. The emphasis that tariffs had a clear impact on inflation but that this effect is beginning to fade, alongside comments that technology investment is helping drive up inflation and that longer-run expectations remain well anchored, points to a view that current price pressures are largely supply-shock driven and potentially transitory rather than demand-led. Daly's support for holding rates steady in July and the need to gather more data suggest a cautious, risk-balanced stance that keeps the DOllar’s policy outlook in a wait-and-see mode despite lingering inflation concerns.
The FXS Fed Sentiment Index fell by 2.23 points to 138.69, indicating a pullback in perceived hawkishness even as the index remains firmly above the neutral 100 mark. This configuration underscores that, while the Fed is still viewed as operating in hawkish territory, Daly's remarks—captured by the slightly lower FXS Speechtracker score—reflect a marginal softening of the policy tone as supply shocks are framed as less likely to generate lasting inflation.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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