Federal Reserve Bank of San Francisco President Mary Daly said tariff impacts have largely stayed within goods sectors, with limited spread to services inflation or broader price expectations anchored around the Fed's 2% target.
"So far, the effects of the tariffs have largely been confined to goods, with little spillover into services inflation or inflation expectations, which remain relatively well-anchored around our 2% target," Daly stated.
The Fed official highlighted labor market softening and moderating wage growth as factors weighing on the case for continued restrictive policy. "We see a labor market that's softening and wage growth that is moderating, so we don't want to make the mistake of holding on too long to high interest rates only to find out we've injured the economy," she said.
Daly's comments suggest reduced pressure from labor costs, a key component Fed policymakers monitor when assessing inflation risks. The contained nature of tariff effects contrasts with earlier concerns that trade restrictions could trigger broader inflationary pressures across the economy.
The Fed maintains a cautious monetary policy stance as it balances competing risks. Officials must weigh persistent inflation concerns against the potential for overtightening that could damage labor markets and economic growth.
Global equity markets showed strength during this period, with technology and AI semiconductor stocks leading gains. The rally suggests investor confidence despite ongoing trade policy uncertainty and regulatory scrutiny in key sectors.
The divergence between contained goods-sector tariff impacts and robust equity performance indicates markets may be pricing in limited economic disruption from current trade policies. Technology stocks have particularly benefited from continued AI investment demand.
Fed policymakers face decisions on interest rate timing as they assess whether current restrictive levels adequately address inflation without unnecessarily constraining growth. The combination of moderating wage pressures and anchored inflation expectations could support arguments for policy easing.
Labor market indicators will remain central to Fed deliberations on rate paths. Daly's emphasis on avoiding prolonged restrictive policy signals concern about potential labor market deterioration if rates stay elevated.
The Fed's next policy decisions will depend on incoming data showing whether services inflation remains contained and labor market softening continues at current pace or accelerates.