Chicago Fed President Austan Goolsby amplified his cautionary stance on Thursday, warning that escalating expectations regarding AI's potential to boost productivity could fuel inflation and compel the Federal Reserve and other central banks to raise interest rates. In prepared remarks for a Bank of Japan conference, Goolsby stated, "The more intense the hype about future productivity, the more interest rates may need to rise to prevent the economy from overheating." He further emphasized that "short-term supply shocks—whether from oil prices, supply chain disruptions, or other factors—could exacerbate the situation."
These comments expand on an argument Goolsby first publicly outlined earlier this month, challenging the view that artificial intelligence acts as a disinflationary force that would provide central banks with room to cut rates. This perspective has found support among many from the Trump administration and the Fed's new chair, Kevin Warsh. In the 2000s, unexpected productivity gains from the broader adoption of computers significantly boosted U.S. economic growth without triggering inflation. Goolsby contends that the scenario differs if productivity gains are anticipated. In such cases, they could trigger a wave of anticipatory consumer spending, driving up prices before the actual productivity improvements materialize. "In that scenario, interest rates might need to increase," Goolsby noted, adding that "this could also impact other countries as productivity gains or anticipated gains spread across borders with new technologies."
On Thursday, Goolsby suggested that recent oil price increases due to the Iran conflict could worsen the situation, expressing concern that this is feeding into broader inflation. He also pointed out that while supply shocks typically constrain economic growth—which tends to dampen inflation—"they could also make inflation issues stemming from anticipated future productivity growth more extreme," though he did not elaborate further.
**Fed Vice Chair Warns of Inflation Risks** Alongside the Chicago Fed President, other Federal Reserve officials have issued hawkish warnings. Fed Vice Chair Philip Jefferson stated that he expects inflation to cool later this year as the effects of rising tariffs and energy costs gradually fade. However, he cautioned that inflation risks remain skewed to the upside. According to the text of his planned speech for a Bank of Japan-hosted conference in Tokyo on Thursday morning, Jefferson mentioned he is closely monitoring whether rising energy costs from the Iran conflict are weighing on consumer spending. He also warned that he continues to see signs of a weakening labor market.
Jefferson reiterated his view that the central bank's current policy stance is well-positioned to respond to any developments. At last month's meeting, Fed officials held the benchmark interest rate steady in the range of 3.5% to 3.75%. Jefferson stated, "I believe this policy stance leaves us well-equipped to address economic developments based on incoming data, the evolving outlook, and the balance of risks." He added, "I am not prejudging the next meeting and look forward to discussing with my colleagues the policy most conducive to achieving our dual mandate goals."
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