Uncertainty Remains Over Fed Rate Hike Outlook; Daly Focuses on Inflation Shock Persistence, Bowman Advances Bank Regulatory Reforms

According to Zhitong Finance APP, the Federal Reserve is currently advancing important adjustments on both monetary policy and bank supervision fronts. San Francisco Fed President Daly stated she supports a rate hike by the Fed in September to address mounting inflation risks; however, whether further hikes will be necessary depends largely on whether the inflationary shocks from tariffs, energy prices, and AI investments prove to be temporary or persist and potentially accumulate. Meanwhile, Fed Vice Chair for Supervision Barr announced plans to restructure the U.S. bank regulatory system and is considering adjustments to the asset size thresholds that trigger stricter capital, liquidity, and stress test requirements for banks.

In an interview on Tuesday, Daly said that if the recent shocks faced by the U.S. economy—such as tariffs, oil price increases due to Middle East tensions, and the AI boom—are traditional temporary shocks that gradually fade, then the Fed may not need to continue raising rates. She indicated that she still sees a certain possibility for such a scenario.

However, if these factors overlap or last longer than previously expected, the necessity for further tightening of monetary policy may increase. Daly specifically mentioned that if a new round of tariff negotiations brings more tariffs, it would be equivalent to adding more shocks even before the first wave has fully dissipated, thus prolonging the period of price pressure.

Notably, Daly also listed AI as a potential inflation driver. She pointed out that demand for AI-related chips is rising, which could further push up price pressures and make the current series of inflationary shocks last even longer. Although Daly is not a voting member of the Federal Open Market Committee (FOMC) this year, she still participates in daily Fed monetary policy discussions.

In September, the Fed raised its benchmark interest rate by 25 basis points to 3.75%-4.00%, marking the first hike in three years. However, recently lower-than-expected inflation data and slowing job growth have significantly cooled market expectations for another hike in October. At the same time, U.S. services sector surveys indicate that business input cost pressures are still rising, with tariffs and fuel costs becoming major issues in supply chains, making the Fed’s next policy decision more complex.

In addition to interest rate policy, the Fed is also preparing to implement large-scale reforms to the bank regulatory structure. Barr stated on Tuesday that the Fed plans to divide the bank supervision system into five geographic regions, with each region led by a “regional head” responsible for coordinating all supervisory activities for local banks. Actual examination work will still be carried out by staff from the respective regional Reserve Banks, but the new organizational structure will further clarify supervisory responsibilities and decision-making power.

Currently, the Fed headquarters in Washington is responsible for formulating bank examination policies, while actual supervision is carried out by 12 regional Reserve Banks across the country. Barr believes the current system lacks sufficiently clear links between “responsibility and accountability.” Citing an independent review of the Silicon Valley Bank collapse, she noted Fed supervisors did not act in a timely manner in that case. Barr expects interviews for the new regional head positions to begin early next year.

Barr also criticized the overreliance on various committees in the Fed’s bank supervision process, arguing that this mechanism not only slows decision-making, but can also blur the assignment of responsibility among staff when problems arise at banks. She advocates streamlining the committee system to enable supervisors to act more quickly on significant risks once identified. Since becoming the Fed’s top bank supervisor in 2025, Barr has replaced some heads of supervisory departments, trimmed staff, and adjusted bank examination guidelines to focus supervisory attention more on risks with potential substantive economic impact, rather than minor procedural issues.

Meanwhile, Barr revealed that the Fed plans to consider adjustments later this year to the asset size thresholds determining when banks face stricter oversight. The reforms may involve raising the current thresholds, which are set at fixed dollar amounts, and establishing a mechanism for adjustment every five years based on inflation and economic growth. This move would grant banks greater room for asset expansion, so that merely growing in size with the economy would not automatically trigger more stringent capital, liquidity, and stress test requirements.

TD Cowen analyst Jaret Seiberg believes this adjustment would be more favorable to large banks, as in the future, banks may not automatically fall into stricter prudential oversight simply because their asset size grows along with the overall economy.