John Williams: The AI Boom Could Force the Fed to Become More Hawkish
The Federal Reserve is beginning to highlight new risks to US inflation. New York Fed President John Williams said on Thursday (July 9) that one of the factors currently being most closely monitored is the surge in demand fueled by artificial intelligence, or AI.
According to Williams, if demand from the AI sector continues to create stronger pressure than supply, the Fed cannot simply ignore it. In a climate of higher and more persistent inflation than expected, monetary policy is deemed necessary to respond.
This statement has the market reassessing the possibility of the Fed maintaining its hawkish stance. This is because AI, previously considered a driver of productivity, is now also beginning to be seen as a source of demand pressure, particularly for chips, data centers, electricity, and technology infrastructure.
Williams believes that if core PCE moves around 0.2% per month throughout the second half of 2026, inflation will still be on track to reach the Fed's 2% annual target. However, if the figure is higher, it would signal that inflation is still too sticky.
This is important because core PCE is one of the main inflation indicators monitored by the Fed. The higher core price pressures, the greater the likelihood that the US central bank will maintain high interest rates for longer.
The Fed itself maintained its benchmark interest rate in the 3.50%–3.75% range at its June meeting. However, the minutes of the latest meeting indicate that some officials are beginning to see a reason to raise interest rates if inflation does not subside soon.
Inflationary pressures are not only coming from AI. The Middle East conflict and the risk of rising energy prices remain major factors that could disrupt the disinflation process. Williams previously assessed that energy prices would likely subside in the next six to 12 months, but acknowledged that inflation remains a key risk for the Fed.
Within the Fed, the debate over the direction of interest rates is also becoming more open. The latest minutes showed that central bank officials remain divided on the inflation outlook and policy, with nine policymakers projecting at least one rate hike in 2026.
Under the leadership of Chairman Kevin Warsh, the Fed has also begun promoting a new approach by establishing several task forces. These focus areas include central bank communications, the balance sheet, inflation models, productivity, and economic data sources.
Williams called the meeting a timely opportunity to review key areas of the central bank's work. However, for the market, the biggest signal remains clear: the Fed is not ready to declare the war on inflation over.
For financial markets, Williams' comments could be read as moderate hawkish sentiment. If inflation data, particularly core PCE, moves higher than 0.2% per month, expectations of interest rate hikes could strengthen again.
As a result, the US dollar and Treasury yields could potentially gain support. Meanwhile, riskier assets such as technology stocks, crypto, and gold could be under pressure again if the market expects the Fed to remain tighter for longer. (arl)
Source: Newsmaker.id
