Fed’s Daly expects further rate hikes as she warns AI is fuelling inflation

AI has undoubtedly added to price pressures, according to San Francisco Federal Reserve (Fed) President Mary Daly, although she said it is “having limited impact on the labour market.”

Delivering a keynote address at the Stanford Institute for Economic Policy Research, Daly warned of the risk that AI could add to inflation. She said the prevailing bias was that “further tightening will be needed.” With inflation spreading to services, Daly added that “inflation pressure is up, not down”.

Daly highlights inflation risks and the policy outlook:

The technology boom is powering the economy

A substantial AI pipeline means activity will continue even if the pace slows

There is no question that AI has added to price pressures

Only a modest share of inflation is directly attributable to AI

The labour market impact of AI remains limited

We face an inflation problem, but AI is not its principal driver

AI poses a risk of making a greater contribution to inflation

AI valuations have been repriced, without an unwinding of interest or enthusiasm

This suggests growth is not at risk

Productivity growth has positive momentum behind it

Extensive work under way could deliver stronger productivity growth over the next 1-3 years

When AI will affect productivity is still too early to judge

High inflation accompanies a stable labour market, positive growth and rising productivity

Bringing inflation down must remain our focus

The need to tackle inflation now should not lead us to overlook the potential disinflationary effect of productivity growth

We cannot afford complacency, as inflation shocks can compound

The bias favours a need for additional tightening

Services are being affected by inflation, which becomes persistent once it rises in that sector

I am comfortable with a September rate rise, and see a need for additional tightening

Price pressures are increasing rather than easing

More firms are telling me they intend to pass higher costs on

But maintaining price stability is the Fed's responsibility; markets do not perform its work

Where the Fed needs to be is consistent with financial market positioning

We gain more time for decisions when financial conditions tighten

We need not decide now on the precise scale or timing of Fed tightening

Many, many quarters remain available for us to take policy decisions