Fed’s Goolsbee warns AI demand could keep inflation running hot
Chicago’s Fed President Austan Goolsbee crossed the wires on Thursday, October 15, noting that September was “a disappointing month for inflation.”
Goolsbee added that he is still optimistic “if inflation drivers fade soon,” adding that if prices are rising from demand overheating linked to AI, that “must be addressed.”
This week’s readings of US CPI and PPI supported a potential rate hike by the Fed at the October 27-28 meeting. Nevertheless, investors are pricing in a 25% chance of a hike, down from 40% a day ago after the CPI release.
Key highlights:
A disappointing month for inflation
Still optimistic if inflation drivers fade soon
If inflation stems from demand overheating due to AI, it's more concerning and must be addressed
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.