Fed’s Mary Daly warns overlapping economic shocks could keep inflation elevated for years

Mary Daly, president of the Federal Reserve Bank of San Francisco, laid out a sobering assessment of the US inflation picture during a keynote address in Tokyo on August 5. The short version: three separate economic shocks are hitting at once, and the Fed isn’t sure yet whether they’ll fade or feed off each other.

Speaking at the Economic and Social Research Institute (ESRI) International Conference, Daly pointed to tariffs that took effect in April 2025, energy price spikes tied to the Iran conflict that began in March 2026, and a surge of artificial intelligence investment as the trio of forces keeping inflation stubbornly above the Fed’s 2% target.

Three shocks, two scenarios

Daly framed the outlook as a fork in the road. In her base case, the shocks prove temporary. Tariff effects stabilize, energy prices ease as peace negotiations progress, and AI spending settles into a sustainable rhythm. Inflation drifts back toward 2%, just on a longer timeline than anyone would prefer.

The darker scenario is more uncomfortable. If these shocks compound rather than dissipate, the US could be staring at inflation running above target for more than five years. That kind of persistence would force the Fed into what Daly called a “significant policy recalibration.”

Inflation has already exceeded the 2% target for more than five years.

On the tariff front, Daly noted that the US statutory tariff rate jumped from below 5% to roughly 11% following what’s been dubbed Liberation Day.

Energy prices are the wildcard she seemed least worried about in the near term. Geopolitical tensions with Iran sent prices higher starting around March 2026, but signals of a potential peace agreement suggest those pressures could ease.

The AI factor is perhaps the most novel element in Daly’s framework. Massive investments in data centers and technology goods are pushing personal consumption expenditures higher. Instead of too little production, there’s too much demand for specific categories of goods and infrastructure, and that demand is showing up in inflation readings.

Holding steady, for now

Daly voiced her support for the FOMC’s decision to keep interest rates unchanged at its July 2026 meeting. She described the current monetary policy stance as “slightly restrictive,” meaning rates are set just above the level that would be considered neutral for the economy.

Her emphasis on a data-driven approach signals that the Fed isn’t ready to commit to a direction. Rate cuts aren’t on the table while inflation remains elevated, but rate hikes aren’t imminent either unless the compounding scenario starts materializing in the numbers.

Daly has led the San Francisco Fed since 2018 and brings three decades of experience at the institution. As a voting member of the FOMC this year, her views carry direct weight in rate decisions.

What investors should watch

The tech sector faces a particularly complex dynamic. AI investment is both a growth story and, according to Daly’s framework, a contributor to the inflation that prevents the Fed from cutting rates.

The tariff overhang is the most politically charged of the three factors. Unlike energy prices or investment cycles, tariff policy is a direct function of political decisions that can shift rapidly.

The key metric to monitor is PCE inflation. If AI-driven spending continues pushing that measure higher while tariff and energy effects persist, the compounding scenario becomes harder to dismiss. And a Fed that’s been patient for five-plus years of above-target inflation may eventually run out of patience.