Federal Reserve regional presidents deliver strong "hawkish" signals! Goolsbee warns that the AI investment boom may overheat the economy, Barkin supports continued rate hikes.

According to Zhihu Finance APP, two Federal Reserve officials delivered speeches on Monday regarding the outlook for the US economy and monetary policy, both expressing concern about persistently high inflation. Chicago Fed President Austan Goolsbee warned that the surge in artificial intelligence (AI) data center construction could further overheat the US economy, prompting the Fed to adopt more aggressive countermeasures. Richmond Fed President Thomas Barkin stated that strong demand and stubborn inflation mean that interest rates still need to be raised further, but given the risks to the economic outlook, the pace of rate hikes should remain cautious.

Speaking at an event in Chicago on Monday, Goolsbee said the Fed must confront the current challenges in controlling costs and inflation. He pointed out that energy prices driven up by the Iran war are gradually spreading to more areas of the US economy, thereby increasing inflationary pressures. Meanwhile, prices in some service sectors not closely linked to energy prices or tariffs are also continuing to rise, further adding to the inflation burden.

Goolsbee specifically noted that the massive investment demand generated by AI data center construction is starting to exhibit classic signs of demand overheating. He stated, “In my view, the current AI data center construction boom is beginning to look more like traditional demand overheating.” He added that when facing an overheated economy, central banks typically need to take “aggressive” countermeasures.

Goolsbee believes that the US job market and overall economic growth remain stable, and the main issue currently facing the economy is still excessive inflation. Data released last Friday showed strong US employment growth in October, with new jobs widely distributed across various industries, further highlighting the resilience of the economy. Goolsbee does not have monetary policy voting rights this year but will have voting rights in 2027.

Barkin, speaking in South Carolina on Monday, stated that US corporate profits have performed well, consumer spending remains strong, and the unemployment rate remains low, all signaling that economic demand is still quite resilient. However, he emphasized that inflation remains stubborn, and monetary policy still needs to play a restraining role.

Barkin said, “The appropriate direction for monetary policy is relatively clear. However, the risks to the demand outlook are also easy to foresee. Therefore, it is wise to adjust policy cautiously.”

In a media briefing following his speech, Barkin further pointed out that more and more companies are reporting rising operating costs and are considering whether to pass these costs on to consumers. He noted that current cost pressures for businesses are widespread, involving gasoline, diesel, computer chips, health insurance, and other fields. “I have spoken to many companies, and they indeed feel their profit margins are under pressure and are considering whether they can pass these costs on. This is an issue that businesses are very focused on right now.”

Regarding the AI investment boom, Barkin described it as a major factor that monetary policymakers cannot avoid, and he noted that its development direction could have profound implications for the short-term economic outlook.

He said that if AI technology ultimately fails to meet market expectations, companies may cut investments, the stock market may fall, and as a result, consumer spending supported by asset appreciation could suffer. On the other hand, if AI development exceeds expectations and more jobs are replaced by technology, this could also weaken consumer demand.

Barkin pointed out that in either scenario, the Fed may need to shift more attention toward the goal of maximum employment.

However, Barkin does not agree with concerns that local opposition to building data centers could slow the pace of AI investment. He believes that the US is vast, and if companies truly need to build data centers, they can always find communities willing to host such projects.

On the consumer outlook, Barkin expects US consumer spending to remain resilient for the remainder of the year, with a strong holiday shopping season anticipated, but he also warned that there is still uncertainty as to how long consumers’ spending capacity can be maintained.

In terms of monetary policy, the Fed raised its benchmark interest rate by 25 basis points in September to a range of 3.75% to 4%, marking the first rate hike since 2023. At the October meeting, the Fed decided—by a vote of 10 to 2—to keep rates unchanged, stating at the time that additional economic data would be needed to determine the appropriate policy rate level.

Since the last meeting, several Fed officials have signaled that further rate hikes are likely. The median rate forecast released in September shows that most officials expect at least one more rate hike this year to help drive inflation back to the 2% target. Currently, US inflation has remained above the Fed’s target for more than five years, and recently, price pressures have been spreading to more areas of the economy.

The market is also increasingly betting on a rate hike in December. Traders currently expect the probability of a Fed rate hike next month to be about 80%. In the period ahead, economic data will become the main driver influencing the Fed’s policy decisions. The US will release October’s Consumer Price Index (CPI) on Tuesday, and before the December FOMC meeting, Fed officials will receive another jobs report and a series of inflation data.

As the AI investment boom continues to boost economic growth and energy and other operating costs keep rising, the Fed faces an increasingly complex policy environment: it must further tighten monetary policy to rein in inflation while remaining alert to the risks of a sudden demand slowdown or an AI-driven shock to the job market.