High energy prices combined with AI demand: Federal Reserve’s No. 3 official says expectation for another rate hike by year-end is “reasonable”

According to Jinshi Finance APP, John Williams, President of the New York Federal Reserve and the Fed's “number three” with permanent voting rights, stated that considering elevated energy prices and demand driven by artificial intelligence investment, there is still a lot of work to be done regarding the inflation issue.

Williams said that market expectations for another rate hike before the end of the year are “a reasonable way to think about it, but we have to see how things develop.”

He noted that the US economy “has shown remarkable resilience despite major shocks” and the labor market is “robust.” However, he pointed out that the ongoing US-Iran war and “quite strong demand from AI” have brought about persistent inflation risks.

He said at an event in London on Thursday, “This is our job: we still have a lot of work to do. Inflation has been above target for five years.”

The US inflation rate in August remained above target at 3.4%, and a key indicator excluding food and energy rose more than expected compared to the previous month.

Last week, Federal Reserve officials unanimously voted to raise the benchmark interest rate by 25 basis points, to a range of 3.75%—4%. Federal Reserve Chairman Kevin Walsh stated that this decision aims to withdraw “a dose of easing” from the economy to help bring inflation down to the Fed's 2% target.

Since then, several policymakers have advocated that higher interest rates may be needed. According to the latest economic forecasts released by the Federal Reserve, most officials expect another 25 basis point rate hike before the end of this year.

Williams sounded quite optimistic about the prospect of an AI-driven productivity boom but warned that if the technology is dominated by only a few large companies, its benefits might not be shared equally.

“As AI investment advances, I expect productivity growth to rebound in the coming years,” he said. Although the productivity boost could reach levels seen before the financial crisis, Williams added that AI is currently only a minor factor.

Regarding the neutral interest rate—meaning a policy level that neither drags down nor pushes up inflation—Williams said there is a “tug of war” between fiscal policy and higher economic growth, and factors such as demographics that tend to depress this indicator.