Fed Governor Waller: "Monetary Tightening Needed If Core Inflation Remains High"

Middle East Conflict and AI Drive Inflationary Pressures

Christopher Waller, a member of the Federal Reserve (Fed) Board of Governors, stated that if core inflation remains elevated in June, the Fed should consider raising its policy rate in the near future. He warned that armed conflicts in the Middle East, tariffs, and the expansion of artificial intelligence (AI) investments could increase inflationary pressures.

Fed (Federal Reserve). Reuters Yonhap News

According to the Financial Times (FT) on July 13 (local time), Governor Waller said in a speech at the New York Association for Business Economics (NYABE) that “if core inflation comes in hot again this week, the Federal Open Market Committee (FOMC) should consider tightening monetary policy in the short term.”

He emphasized that “doing nothing and just watching until inflation melts under our intense scrutiny is not an option,” insisting that the Fed must act if price increases persist.

Waller's remarks came as market expectations for rate hikes moved forward, with international oil prices surging again amid renewed conflict between the United States and Iran. In the interest rate futures market, there is now an expectation that the Fed could raise the policy rate by 0.25 percentage points twice by April next year, with the first hike possibly coming in October. Until last week, the market had anticipated only one rate hike in December.

The U.S. inflation rate has risen again in recent months. The personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, increased by 4.1% year-on-year in May, far exceeding the Fed's 2% target.

The consumer price index (CPI) also rose by 4.2% in May, reaching its highest level in three years. The market expects the June CPI, to be released on July 14, to slow to 3.8%. However, core CPI is projected to remain at 2.9%.

Governor Waller predicted that the overall inflation rate would slow last month due to the decline in oil prices. However, he pointed out that core inflation had already begun to rise prior to the recent oil price surge, and that persistent upward pressure has also been observed in recent commodity prices.

International oil prices surged well above $100 per barrel after the United States and Israel attacked Iran in February, but fell to the low $70 range earlier this month due to a ceasefire in the Gulf and increased energy exports through the Strait of Hormuz. However, as the United States and Iran have once again raised the possibility of closing the Strait of Hormuz, Brent crude rose more than 6% on the day, climbing above $80 per barrel.

Governor Waller cited energy prices, tariffs, and the ripple effects of demand for AI infrastructure investment as the current drivers of inflationary pressure.

He said, “So far, the surge in demand for AI-related equipment has had only a limited impact on overall prices,” but added, “If the boom in AI investment continues, it could become a bigger driver of inflation in the future.”

He went on to say, “We are alert to the possibility that rising core prices may signal that inflationary pressures are spreading throughout the economy,” and stressed, “The FOMC must be prepared to tighten monetary policy to prevent a recurrence of the inflation episodes of 2021 and 2022.”

This content was produced with the assistance of AI translation services.