Fed’s Daly Signals Policy Stability as AI Reshapes Economic Outlook

San Francisco Federal Reserve President Mary Daly has signaled that the current stance of monetary policy is effectively calibrated to meet the central bank's dual mandate of price stability and maximum employment. Speaking on the current economic landscape, Daly noted that policy is "in a good place," a phrase often used by Fed officials to indicate a preference for maintaining the status quo while they wait for further data. This assessment comes at a critical juncture where the traditional metrics of inflation and labor market tightness are being viewed through the lens of a significant technological shift: the rapid integration of artificial intelligence across the American economy.

The Federal Reserve's pivot toward assessing AI is not merely a nod to a trending technology but a fundamental inquiry into the future of U.S. productivity. For decades, productivity growth has been the missing piece of the economic puzzle, often remaining sluggish despite rapid digitalization. However, the emergence of generative AI presents a potential structural break. If AI can significantly boost output per hour, the economy could theoretically sustain faster growth and higher wage increases without triggering the kind of cost-push inflation that forced the Fed into its aggressive tightening cycle in recent years. Daly’s comments suggest that the Fed is moving beyond cyclical analysis to understand these structural tailwinds.

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San Francisco Federal Reserve President Mary Daly has signaled that the current stance of monetary policy is effectively calibrated to meet the central bank's dual mandate of price stability and maximum employment.

One of the most complex challenges facing Daly and her colleagues is the determination of the "neutral rate" of interest—the level at which policy neither stimulates nor restrains growth. If AI increases the demand for capital investment and boosts the potential growth rate of the economy, the neutral rate may be higher than the levels seen during the post-2008 era. This would mean that even when the Fed eventually decides to cut rates, they may not return to the near-zero levels that defined the previous decade. By stating policy is in a good place, Daly is buying time for the FOMC to observe whether these productivity gains are manifesting in the data or if they remain a localized phenomenon within the technology sector.

The labor market remains the primary transmission mechanism for AI’s economic impact. While fears of mass displacement persist, the Fed is closely monitoring whether AI acts as a "labor-augmenting" force that allows workers to move into higher-value roles. Recent data has shown a resilient labor market despite high interest rates, leading some economists to speculate that AI-driven efficiencies are already allowing firms to manage costs without resorting to large-scale layoffs. Daly’s cautious optimism reflects a belief that the current restrictive policy has successfully cooled the economy enough to allow these technological transitions to occur without overheating the system.

Looking forward, investors should expect the Fed to incorporate more qualitative and quantitative AI-related metrics into their communications. The transition from a focus on "inflation fighting" to "productivity monitoring" marks a new phase in the post-pandemic recovery. While the immediate path for interest rates appears to be a plateau, the long-term trajectory will be dictated by whether AI delivers on its promise to rewrite the rules of economic efficiency. For now, the Fed remains in a state of watchful waiting, confident that their current policy provides the necessary buffer to navigate these uncharted waters.