Chicago Fed president warns of rising inflation risks, saying that increased productivity from AI does not necessarily mean a rate cut.

Chicago Fed President Evans on Wednesday issued a cautious warning about the US inflation outlook, noting that since the conflict between the US and Iran, inflation has not only not continued to fall towards the Federal Reserve's 2% target, but has risen. Evans said in a media interview that the overall labor market in the United States is still stable, and the more major issue that the Federal Reserve currently faces is likely to be high inflation. He said, "This is why I remain highly vigilant about the risks of inflation, because it is not currently a deflationary shock, but simply an inflationary shock. The longer this situation persists, the more concerned I become." Evans pointed out that although the pace of hiring has slowed, the layoff rate remains low, indicating that the employment market overall is still healthy. He warned that if the conflict in the Middle East lasts too long and leads to high oil prices persisting, consumers may gradually form an expectation that "high inflation will continue," which could pose a "significant problem" for the central bank. At the same time, Evans also warned against the recent market views that "AI enhancing productivity will support rate cuts." In a discussion at the Milken Institute Global Conference, Evans said that the impact of productivity growth on monetary policy depends on whether it is an "unexpected occurrence" or "anticipated by the market." He pointed out that if productivity gains occur suddenly, inflationary pressures are usually more manageable, and the Federal Reserve may have room to cut rates. However, if the market anticipates a significant increase in productivity in advance, business investment and consumer spending may accelerate, pushing up inflation and ultimately requiring higher rates to curb it. Recently, some US government officials believe that productivity gains driven by artificial intelligence can help the US economy achieve faster growth without pushing up inflation. The next nominee for Federal Reserve Chair appointed by President Trump, Powell, has also advocated for lower rates using a similar logic. Evans cited the experience during the term of former Federal Reserve Chair Greenspan in the 1990s, pointing out that initial productivity gains did help boost business profits and job growth without significantly increasing inflation, allowing the Federal Reserve to maintain rate stability. However, as productivity gains were widely confirmed by the market and led to rapid investment and asset price increases, Greenspan later became wary of overheating risks in the market, and the Federal Reserve eventually significantly raised rates. Evans emphasized that the Federal Reserve needs to be wary of economic activity built on future growth expectations, including consumption driven by stock market gains and capital investment rapidly increasing due to rising valuations. He said, "The more optimistic the market is about future productivity gains, the more the Federal Reserve needs to prevent the economy from overheating. The greater the speculation, the higher rates may need to rise."