The AI investment boom intensifies inflationary pressure Cleveland Federal Reserve Chairman Hamak reiterated the need to further raise interest rates

The Zhitong Finance App learned that Cleveland Federal Reserve Chairman Hamak reiterated on Thursday that the Federal Reserve needs to further raise interest rates to cope with demand pressure and continued high inflation brought about by the artificial intelligence (AI) investment boom. She believes that the Federal Reserve should adjust monetary policy to a restrictive level and prefer to gradually tighten policy through smaller and more frequent interest rate hikes rather than adopt more aggressive interest rate hikes.

Hamak said at an event in Columbus, Ohio: “I think it's critical that we adjust our monetary policy to a restrictive level to help reduce inflation back to the 2% target. If we don't, I'm worried that inflation expectations may begin to solidify.”

As tech giants invest heavily in AI infrastructure, the increase in demand brought about by data center construction is becoming one of the inflation risks that the Federal Reserve is concerned about. Hamak said that the Federal Reserve has sufficient policy tools to deal with the demand pressure brought about by data center construction, but the current inflation performance is still worrying. “Looking at the overall situation, inflation is still sticky and lasts longer than I would like to see,” she said.

According to the latest economic data, the increase in core inflation in the US in October, excluding food and energy prices, exceeded market expectations. Hamak believes that this report shows that the progress made by the US in reducing inflation has actually come to a standstill. “The latest data I've seen shows that inflation is moving in the wrong direction. We're moving away from the 2% target rather than moving closer to it.”

At last month's monetary policy meeting, most Federal Reserve officials supported keeping the benchmark interest rate unchanged in the 3.75% to 4% range. Hamak was one of the two officials who voted against it. She advocated a 25 basis point increase in interest rates at the time.

As for the future policy path, Hamak continues to support smaller and more frequent interest rate adjustments. She believes that compared with a one-time sharp interest rate hike, gradually raising interest rates can make it easier for enterprises and households to adapt to changes in financing costs, thereby reducing the impact of monetary policy tightening on the overall economy.

Hamak said, “If we raise interest rates steadily with a smaller margin and increase the frequency of interest rate hikes, businesses and households will be more likely to cope with these changes. Compared to larger and more aggressive policy adjustments, this approach interferes less with the overall economy.”

Currently, Federal Reserve officials still disagree on the proper pace for future interest rate hikes. Some officials support gradual adjustments, and Federal Reserve Governor Waller warned this week that the Federal Reserve may need to consider raising interest rates by 50 basis points at the December meeting.

In response, Hamak said that if the Federal Reserve's policy actions lag behind the development of the inflation situation, policymakers may consider adopting more aggressive measures to raise interest rates, but she believes that this situation has not yet occurred.

“I don't think we're lagging behind the situation right now, but if this does happen in the future, then we may need to consider taking more drastic action.” Hamak said she will remain open to various policy options at the December monetary policy meeting.

As the process of cooling US inflation comes to a standstill and AI infrastructure investment continues to bring new pressure on demand, discussions within the Federal Reserve on further tightening monetary policy are heating up. Inflation and economic data to be released in the future will be a key factor in determining whether the Federal Reserve will raise interest rates in December and the extent of interest rate hikes.