AI demand could prolong energy shock and inflation risks warns Fed official

Mary Daly, president of the Federal Reserve Bank of San Francisco, warns that the demand for AI could extend an energy shock, potentially pushing up prices beyond the current data center boom. Daly highlights that the Fed typically views supply shocks as temporary, but the AI-driven pressure on chip and technology prices may last longer than expected, compounding inflation risks.

Companies in Daly's district, which includes Silicon Valley, are preparing for tighter chip supplies. Some are securing forward contracts for memory chips, a notable shift in a fast-depreciating market where firms usually avoid long-term commitments. Others are reengineering products to reduce chip dependency, signaling broader concerns about supply constraints.

The risk is that AI hardware demand could spill into the broader semiconductor market, raising costs for industries like automobiles and appliances. Daly points to post-pandemic chip shortages that drove up vehicle prices, cautioning that similar bottlenecks could re-emerge. She also notes that higher interest rates may not significantly slow AI spending by hyperscalers, though they could impact other firms investing in the technology.

Daly supported the Fed's recent interest rate hike, emphasizing that further action will depend on whether energy, trade, and other shocks abate. She remains open to pausing rate hikes if geopolitical events ease inflationary pressures. However, some Fed colleagues argue for more adjustments, citing broader inflationary forces at play.