SF Fed President Explains Why Getting Inflation From 2.75% to 2% Is So Difficult

Why It Matters

The explanation frames the Fed’s near-term outlook and supports a patient monetary policy stance: transitory shocks and sectoral frictions, not runaway demand, are prolonging the descent to 2%, affecting rate decisions and market expectations. It signals that inflation could fall further without dramatic policy tightening if labor and housing trends continue.

Summary

San Francisco Fed President Mary Daly said getting inflation from about 2.75% to the 2% target has been unusually difficult because of a sequence of shocks rather than an inherent ‘last mile’ problem. She singled out tariff announcements that raised input costs, slow-moving housing services as rents and leases roll over, and persistent services inflation tied to labor costs. Daly noted firms are increasingly using productivity gains and technologies like machine learning to absorb costs rather than pass them through to prices. Overall, she expects inflation to continue drifting down as the labor market cools, housing services decline and tariff effects fade.

Original Description

Mary C. Daly, President of the Federal Reserve Bank of San Francisco, breaks down the three main factors making the final stage of inflation reduction challenging: tariff impacts on goods prices, slow-moving housing services inflation due to lease turnover timing, and labor costs that comprise two-thirds of service sector expenses. She explains how the labor market needs to stabilize, housing lease cycles must complete, and tariffs need to "roll through and off" before inflation reaches the Fed's 2% target. Daly also notes that firms are increasingly using AI and machine learning to manage costs without raising prices. This excerpt is from a February 2026 conversation with former Dallas Fed President Rob Kaplan.