Federal Reserve Presidents Warn AI and Tariffs Drive Inflation

Federal Reserve officials warned Tuesday that artificial intelligence and geopolitical shocks are complicating the central bank's efforts to stabilize inflation. Mary Daly, president of the San Francisco Federal Reserve, stated that further interest-rate hikes will depend on whether current inflationary pressures prove temporary or persistent. She noted that while a September rate hike addressed immediate risks, additional tightening may be unnecessary if pressures from tariffs, Middle East-driven oil prices, and AI fade.

Daly specifically warned that AI-related demand for chips could create persistent inflation by competing for supplies used in cars and appliances. She added that a second round of tariff negotiations could compound existing shocks and extend the inflationary period.

Similarly, Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, identified energy prices and AI-driven demand in semiconductors and data centers as primary inflation drivers. Schmid noted the difficulty of reducing inflation to the 2% target without triggering a recession. He also observed that rising long-term Treasury yields are altering investment behaviors by changing the cost of capital and housing dynamics, though the Federal Reserve remains focused on the short-term policy rate.