Jefferson: Inflation difficult to cool down, may need to raise interest rates AI and energy shocks put the Federal Reserve in a dilemma.

Federal Reserve Vice Chairman Philip Jefferson said on Thursday that if inflation does not cool down quickly, the Fed should consider raising interest rates, but he also said that the current monetary policy situation is good. Jefferson also stated that the deployment of artificial intelligence (AI) combined with energy disruptions from the conflict in Iran has put the Fed's policy in a difficult balancing act. Speaking at an event at Stanford University in California on Thursday, Jefferson said that the current interest rate policy of the Fed may support the labor market while also bringing down inflation. However, he added a caveat. "If actual inflation does not start to cool down in the short term, I think we may need to reconsider our current policy stance," he said. "Fortunately, our current policy stance allows us to respond well to developments in the economy." Inflation concerns reignited, and Fed officials are intensifying their hawkish stance With more stable signs in the labor market, Fed officials have shifted their focus to inflation issues. Pressure from tariffs has eased, but concerns remain about energy prices affected by the situation in the Middle East. Meanwhile, the market demand brought about by AI development has become a new focus. After weaker-than-expected consumer price data in June in the U.S., investors abandoned expectations of a rate hike by the Fed in July, but they still expect a hike later this year. Earlier on Thursday, two Fed officials expressed stronger concerns about rising prices. Lori Logan, a 2026 FOMC voter and president of the Dallas Fed, became the first Fed official to call for a rate hike, stating that inflation does not seem to be returning to the Fed's 2% target level. "I currently believe that a modest rate hike would better balance risks and prospects," Logan said on Thursday. Jeffrey Schmidt, president of the Kansas City Fed, said that given the possibility of further inflation risks in the coming months, inflation is his top concern. Despite better-than-expected inflation data for June in the U.S., Schmidt warned that it is too early to conclude that inflation has begun a downward trend. "I am most concerned about inflation, which is currently at a high level and has been persistently above target for too long. Therefore, in formulating an appropriate monetary policy path, I still focus on the issue of inflation," he said. This week, Fed Chairman Kevin Walsh testified before Congress, stating that policymakers have "zero tolerance" for high inflation and are committed to restoring price stability, but he did not explicitly state support for a rate hike. At the first FOMC meeting after Walsh took office in June, Fed officials voted to keep the Fed's benchmark rate in the range of 3.5% to 3.75% for the fourth consecutive time. Fed officials will hold their next monetary policy meeting on July 28-29. Although some officials are concerned about high inflation and have hinted at the need for a rate hike, the market currently expects the Fed to keep rates unchanged during this meeting. According to the Chicago Mercantile Exchange's "Fed Watch" tool, traders currently see an 88.8% probability that the Fed will keep rates unchanged in July, with the market generally expecting the next rate hike to be delayed until September or October. The intertwining of AI and energy shocks puts the Fed in a "difficult balancing act" In his speech, Jefferson discussed the potential impact of AI on the U.S. economy, emphasizing that AI could impact both supply and demand, and changes in supply and demand could have opposite effects on inflation. "The timing of the impact on both ends of supply and demand is crucial for monetary policymakers," he said. Jefferson said that the widespread deployment of AI combined with energy shocks triggered by the conflict in Iran has put the Fed in a "difficult balancing act," while increasing the risk of sustained inflation and unanchored inflation expectations. He said, "Whether the recent rise in energy prices will transmit to long-term inflation expectations, leading to sustained inflation, is a crucial question." It is worth noting that on July 9, 2026, the Fed announced the establishment of a productivity and employment task force to assess the impact of new general-purpose technologies, including AI, on the economy. In the minutes of the June monetary policy meeting, the Fed, for the first time, listed the "AI investment boom" as one of the three main sources of inflationary pressure, alongside trade policies and conflicts with GEO Group Inc. Walsh has repeatedly stated publicly that AI is generally beneficial to the economy and is expected to be an important force against inflation. However, he also admitted that while AI has spurred increased business investment, it has also brought uncertainty to the economy. He said, "We are not yet clear on how much the economy can benefit from the development of AI. The new opportunities in the economy also bring new challenges to policymakers. The Fed is closely monitoring the impact of these changes on inflation and the labor market." Currently, the "AI trading" frenzy in the U.S. stock market has significantly cooled down, with the Philadelphia Semiconductor Index falling nearly 17% so far this month, just one step away from a technical bear market. The storage chip sector has been hit hard in this round of correction, with leading stocks like Micron Technology, Inc. (MU.US) and Sandisk (SNDK.US) suffering consecutive declines. Several Fed officials have made hawkish statements one after another, coupled with the fluctuation in oil prices due to the Middle East situation, exacerbating sticky inflation and raising the risk of rate hikes, further dampening the AI market sentiment.