Fed’s Daly warns AI is fueling inflation, sees more rate hikes ahead
San Francisco Federal Reserve (Fed) President Mary Daly commented that there is no doubt AI has fueled price pressure and that it is “having limited impact on the labour market.”
In a keynote speech at the Stanford Institute for Economic Policy Research, Daly said there is a risk that AI could contribute to inflation and that the prevailing bias is that “further tightening will be needed.” Daly added that inflation is bleeding into services and that “inflation pressure is up, not down”.
Key takeaways:
Economy being driven by technology boom
AI pipeline is deep, so continues even if it slows
No doubt of AI-fueled price pressure
AI is contributing directly only a modest amount to inflation
AI having limited impact on labor market
We have an inflation problem, but AI is not doing most of the driving
There is risk AI could contribute more to inflation
There has been repricing in AI valuations, but it's not the unwinding of interest or enthusiasm
That suggests there's not a risk to growth
There is positive momentum for productivity growth
A lot of work being done that we might see more productivity growth in next 1-3 years
It's too early to say when AI productivity impact will arrive
Stable labor market, positive growth, productivity growth, and high inflation
We have to focus on bringing inflation down
Just because we have to fight inflation problem now doesn't mean we should ignore potential that productivity growth could be disinflationary
Inflation shocks can compound, we can't be complacent
Bias is that further tightening will be needed
Inflation is bleeding into services, and once services inflation rises it's sticky
I'm comfortable with September hike, further tightening needed
Inflation pressure is up, not down
I increasingly hear firms say they're going to pass on higher costs
But markets don't do the work of the Fed, and keeping prices stable is the job of the Fed
Financial markets are in alignment with where Fed needs to be
Tighter financial conditions give us more time to make decisions
Exactly how much Fed tightening and when is a decision we don't need to make now
We have many, many quarters to make policy decisions
US Dollar Price Today
The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.33% | 0.33% | -0.05% | 0.04% | 0.64% | 0.33% | 0.32% | |
| EUR | -0.33% | 0.00% | -0.37% | -0.29% | 0.32% | -0.00% | -0.02% | |
| GBP | -0.33% | -0.01% | -0.36% | -0.28% | 0.32% | -0.00% | -0.02% | |
| JPY | 0.05% | 0.37% | 0.36% | 0.08% | 0.68% | 0.36% | 0.36% | |
| CAD | -0.04% | 0.29% | 0.28% | -0.08% | 0.60% | 0.29% | 0.28% | |
| AUD | -0.64% | -0.32% | -0.32% | -0.68% | -0.60% | -0.30% | -0.32% | |
| NZD | -0.33% | 0.00% | 0.00% | -0.36% | -0.29% | 0.30% | 0.00% | |
| CHF | -0.32% | 0.02% | 0.02% | -0.36% | -0.28% | 0.32% | -0.00% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
