Federal Reserve official: The current choice is between remaining patient or raising interest rates, inflation is the number one risk to the economy, and AI has not yet had an impact

Federal Reserve officials spoke intensively on Thursday, June 4th Eastern Time, with three regional Fed presidents sending more hawkish signals on the issues of inflation and interest rate trends. They said the Fed's current core decision is whether to remain patient and keep rates unchanged, or to proactively hike rates to suppress persistently high inflation. One official made it clear that AI has neither raised nor lowered inflation at present and has limited impact on short-term monetary policy decisions.

Kansas City Fed President Jeffrey Schmid stated bluntly that inflation is the number one risk facing the US economy, and for the first time publicly included rate hikes in the policy discussion, no longer mentioning rate cuts.

San Francisco Fed President Mary Daly said that monetary policy is currently at a reasonable position, but economic uncertainty is too high to provide forward guidance, which may mislead the market. The Fed is ready for a "two-way response." Market interest rate futures show that investors now see a relatively high probability of a rate hike this year.

The Fed is expected to hold its next FOMC monetary policy meeting from June 16 to 17, which will be the first FOMC meeting chaired by the new Fed Chair Kevin Warsh. The market generally expects policy rates to remain unchanged at that time.

Daly and Richmond Fed President Thomas Barkin, who also spoke on Thursday, will have FOMC voting rights in 2025 and 2027, while Schmid is a voting member in 2026 and 2028. Therefore, the statements of the three have attracted considerable market attention.

Schmid spoke directly at an economic forum in Oklahoma on Thursday, clearly presenting a rate hike as an option.

He said: "The biggest question right now is, do we continue to remain patient? Our inflation numbers may have climbed to around 3.5%, and no one likes that number. Is this temporary... or should we take action? Should we say, well, it's time to hike by 25 or 50 basis points and see if we can suppress it?"

Schmid's remarks reflect deepening concerns within the Fed about the persistence of inflation. Previously, Fed officials generally believed that inflation driven by tariffs and oil prices would fade naturally over time, but this judgment is now being challenged. According to Reuters, the Fed's policy rate has remained in the 3.5% to 3.75% range since last December, while inflation has been above the 2% policy target for more than five consecutive years.

Schmid did not mention the possibility of a rate cut at all. This stands in sharp contrast to the beginning of the year, when most officials saw rate cuts as their base case. He emphasized that the 2% inflation target facilitates clear communication and that the Fed should not take an ambiguous stance on this issue: "We should not make this message ambiguous."

Daly said at the Bloomberg Technology Conference in San Francisco on Thursday that monetary policy is in a good place at the moment, but the economic outlook is too uncertain to provide clear guidance on the direction of interest rates.

She said: "We are ready for a two-way response in terms of rates, no matter how the economy evolves. I think providing more forward guidance at this time could ultimately be misleading because we have to wait for the economic situation to unfold."

On inflation, Daly noted that the Fed's preferred inflation gauge rose 3.8% year-on-year in April, the biggest increase since 2023. She attributed the main drivers of current inflation to tariffs, as well as the rise in energy and food prices since the outbreak of the Iran war—persistently rising oil prices have spilled over into prices for goods such as fertilizer and equipment. On the employment front, she mentioned that the current unemployment rate is 4.3%, and the labor market is showing signs of stabilization.

Daly said that as the economic situation develops, more and more officials are inclined for the Fed to make it clear that all options, including rate cuts and rate hikes, are under consideration. According to federal funds futures contracts, investors now see a greater possibility of a rate hike this year.

On the widely discussed market topic of AI’s impact on the economy, Daly said that AI is currently neither a factor pushing inflation up nor has it yet shown a broad-based improvement in productivity at the macro level.

She said, "We haven’t yet seen a large-scale productivity boost," and companies’ returns on AI investment are "yet to be realized," but corporate enthusiasm for the technology is "quite high."

According to reports, Daly believes that within a five to ten year time window, AI could become a force lowering inflation, but for the 12-month operating horizon of monetary policy, this AI effect "is not a pressing issue."

She also pointed out that generative AI is mainly being used at present to assist workers rather than replace them. Whether AI-driven productivity gains will ultimately lead to a deflationary effect depends on timing as a key variable.

Daly said she is optimistic about AI, and expects 2027 to be a "touchstone" year for the AI industry.

Barkin said after attending a speaking engagement in Loudoun County, Virginia on Thursday that the US labor market is currently in a balanced state, with no obvious overall increase in hiring demand.

He said, "I don’t see any changes in the job market," although there are rising demand signals in technical and healthcare fields, but overall, the labor market is not tight.

Barkin said, when communicating with employers, "I haven’t seen concerns about what I would call a bubble or tension." This assessment confirms Schmid's view that the overall economy is performing well, and echoes Daly’s observation about a stabilizing labor market, further supporting the Fed’s current stance of waiting for more data before taking action.