Fed Vice Chair Warns of Inflation Risks Amid Middle East Conflict and AI Gains

Federal Reserve Vice Chair Philip N. Jefferson recently spoke at Stanford University about the challenges of responding to unpredictable economic shocks.

The conflict in the Middle East and the rapid development of artificial intelligence are two current events that illustrate these challenges, according to Jefferson.

Jefferson outlined a framework for distinguishing between demand and supply shocks, which can affect inflation and employment. The output gap is used to determine if there is excess demand or excess supply in the economy.

The current situation in the Middle East has been described as part of a supply shock, with stress on global oil and energy-related supply chains driving up oil prices and lowering real incomes. However, Jefferson noted that the U.S. is now a net oil exporter and its economy is less oil-intensive than it was in past decades.