Fed Policy Faces Tariff and Oil Risks, Daly Says in Spain

Fed policy remains slightly restrictive, Mary Daly said, as tariffs, oil prices and uncertain inflation paths complicate central bank choices.

Daly, president of the Federal Reserve Bank of San Francisco, said Thursday at a Bank of Spain event in Santander, Spain, that inflation should begin to cool because policy is still leaning against price pressure. “We continue to have policy in a slightly restrictive position, so inflation should come down,” Daly said.

Daly points to tariffs and oil

The inflation warning centered on two forces Daly said had pushed prices higher this spring: tariffs and oil. She linked the pickup to trade measures and higher energy costs after US military action involving Iran, a combination that can feed into consumer prices through imported goods, fuel and transport costs.

Daly also pointed to the easing in oil prices after a ceasefire agreement between the US and Iran. She said the retreat in the energy shock provides “hope for relief,” while making clear that a calmer oil market does not settle the policy question.

Oil matters because it moves quickly through gasoline, freight and production costs. Tariffs work differently, raising the cost of affected imports and leaving businesses to decide whether to absorb the increase, cut margins or pass it to customers.

Restrictive stance frames Fed options

Daly’s description of policy as only slightly restrictive is the central point for investors and companies. It suggests the Fed is still applying pressure to demand, but not necessarily with a stance she portrayed as deeply tight.

That distinction matters because inflation that fades after a temporary tariff or oil shock calls for a different reaction than inflation that becomes persistent. Daly said the Fed may need to respond more forcefully if price pressures prove durable, a risk that keeps the policy path conditional rather than fixed.

The immediate audience for those remarks includes banks, bond investors, importers and energy-sensitive businesses. For lenders and rate-sensitive sectors, even a small change in the expected Fed response can affect funding costs, loan demand and the timing of investment decisions.

The Fed also faces a communication problem. Officials need to explain why they can expect inflation to slow while still warning that the same data could justify a tougher response if price gains do not ease.

Three paths for inflation pressure

If oil prices remain contained and tariff effects prove limited, the global macro effect would be a softer energy and goods-price impulse. For the Fed, that would support Daly’s view that a slightly restrictive setting can work over time; for banks, retailers and transport companies, it would reduce pressure from financing costs and input prices.

If tariff costs and energy prices keep feeding into inflation, the mechanism changes. Global trade and consumption would face a tighter price environment, the Fed could be pushed toward a stronger anti-inflation response, and rate-sensitive sectors such as housing, autos and commercial lending would face a more difficult demand backdrop.

A third path is mixed data, with energy relief offset by stickier tariff effects or services inflation. In that case, global markets would likely stay focused on every inflation release, the Fed would have less room to declare progress, and companies would be left managing inventories, pricing and borrowing plans under a longer period of uncertainty.

The main open questions are whether oil-price relief lasts, how much of the tariff cost reaches consumers, and whether inflation expectations remain anchored. Daly’s remarks did not offer a timetable for a policy shift, leaving the next phase dependent on incoming inflation evidence and the durability of the ceasefire-driven energy reprieve.