AI investment boom intensifies inflationary pressure; Cleveland Fed President Hammack reiterates need for further rate hikes.

Cleveland Fed President Hammack reiterated on Thursday that the Federal Reserve needs to raise interest rates further to address demand pressures stemming from the artificial intelligence (AI) investment boom and persistently elevated inflation. She believes the Fed should adjust monetary policy to a restrictive level and favors gradually tightening policy through smaller, more frequent rate hikes rather than more aggressive measures. Speaking at an event in Columbus, Ohio, Hammack said: "I think it is critical that we adjust monetary policy to a restrictive level to help bring inflation back down to the 2% target. If we don't, I worry that inflation expectations could begin to become entrenched." As tech giants invest heavily in AI infrastructure, demand growth from data center construction is becoming one of the inflation risks the Fed is monitoring. Hammack said the Fed has sufficient policy tools to address the demand pressures brought by data center construction, but current inflation performance remains concerning. She noted: "Looking at the overall picture, inflation remains sticky and has persisted longer than I would like to see." The latest economic data showed that U.S. core inflation, excluding food and energy prices, rose more than market expectations in October. Hammack believes the report indicates that progress in reducing inflation in the U.S. has effectively stalled. "The latest data I see shows inflation is moving in the wrong direction. We are moving away from the 2% target, not toward it." At last month's monetary policy meeting, most Fed officials supported keeping the benchmark interest rate unchanged in the 3.75% to 4% range. Hammack was one of two officials who voted against the decision, advocating at the time for a 25-basis-point rate hike. Regarding the future policy path, Hammack continues to support adjusting rates in smaller increments and at a higher frequency. She believes that compared with a one-time large rate hike, gradually raising rates will allow businesses and households to more easily adapt to changes in financing costs, thereby reducing the impact of monetary policy tightening on the overall economy. Hammack said: "If we raise rates steadily in smaller increments and at a higher frequency, businesses and households will find it easier to cope with these changes. Compared with larger, more aggressive policy adjustments, this approach causes less disruption to the overall economy." Currently, Fed officials remain divided on the appropriate pace of future rate hikes. Some officials support gradual adjustments, while Fed Governor Waller warned this week that the Fed may need to consider a 50-basis-point rate hike at the December meeting. In response, Hammack said that if the Fed's policy actions fall behind the development of the inflation situation, policymakers could consider more aggressive rate hike measures, but she believes that situation has not yet arisen. "I don't think we are behind the curve right now, but if that situation does arise in the future, then we may need to consider taking larger-scale action." Hammack said she will keep an open mind on various policy options at the December monetary policy meeting. As the U.S. disinflation process stalls and AI infrastructure investment continues to bring new demand pressures, discussions within the Fed about further tightening monetary policy are intensifying. Future inflation and economic data will become key factors in determining whether the Fed raises rates in December and by how much.