Federal Reserve officials are turning hawkish one after another! The vice chairman reminds that the risk of inflation remains "tilted to the upside", and Gulsby warns that "AI enthusiasm" may push up inflation and force a rate hike.

Chicago Fed Chairman Austan Goolsbee stepped up his warning on Thursday, pointing out that people's expectations for AI to boost productivity potential are increasing, which could lead to inflation and force the Fed and other central banks to raise interest rates. In remarks prepared for a Bank of Japan conference, Goolsbee stated, "The more speculation there is about future productivity, the more likely it is that interest rates will need to be raised to prevent the economy from overheating," "Moreover, more importantly, the short-term supply shocks we face - whether from oil prices, supply chain disruptions, or other factors - will make matters worse." These remarks are based on an argument Goolsbee made earlier this month for the first time, refuting the view that "artificial intelligence is a force for disinflation and can provide room for central banks to lower interest rates." This view is supported by many in the Trump administration as well as the Fed's new Chair Kevin Warsh. In the 1990s, the unexpected productivity gains brought about by the more widespread use of computers greatly promoted economic growth in the United States without causing inflation. Goolsbee believes that if the productivity gains are expected, the situation will be different. In this case, they may trigger an anticipatory consumption boom, pushing up prices before actual productivity gains are achieved. "In this case, interest rates may need to rise," Goolsbee said. "This may also impact other countries, as gains in productivity or anticipated gains will spread with the cross-border dissemination of new technologies." Goolsbee suggested on Thursday that recent oil price increases due to the Iran war could make the situation worse, as he fears this is transmitting more broadly into inflation. Goolsbee also pointed out that while supply shocks usually limit economic growth (which often suppresses inflation), "they can also make the inflation problems brought by anticipated future productivity growth more extreme," although he did not elaborate further on this point. Fed Vice Chair Warns of Inflation Risks In addition to the Chicago Fed Chair, other Fed officials have issued hawkish warnings. Fed Vice Chair Philip Jefferson stated that as the effects of tariffs and rising energy costs gradually fade, he expects inflation to cool off later this year, but warned that inflation risks still skew to the upside. According to the text of his speech planned to be delivered at a conference hosted by the Bank of Japan in Tokyo on Thursday morning, Jefferson stated that he is closely monitoring whether the rise in energy costs due to the Iran war is dragging consumer spending. He also warned that he continues to see signs of weakness in the labor market. Jefferson reiterated his view that central banks' current policy settings are fully capable of responding to any developments. At last month's meeting, Fed officials kept the benchmark interest rate unchanged in the range of 3.5% to 3.75%. "I believe that this policy stance gives us all the tools we need to respond to the evolving economic outlook and risks in line with our dual mandate," Jefferson stated. "I have no speculation about the next meeting, and look forward to discussing policy with my colleagues to achieve our dual mandate goals."