Federal Reserve officials warn: Continued energy inflation and rising AI productivity expectations may force central banks to raise interest rates

Federal Reserve Chicago President Austan Goolsby stated on May 28 that energy inflation triggered by the Iran conflict has lasted longer than expected, causing stagflationary shocks to Asian economies, while warning that rising AI productivity expectations combined with oil price increases may force central banks to raise interest rates.
(Background: US-Iran peace agreement draft revealed! US troops withdraw in exchange for lifting sanctions on the Strait of Hormuz, causing crude oil to plummet below $89)
(Additional context: Oil prices rise, ETH falls! Tom Lee: Ethereum’s negative correlation with oil prices hits a record high)

On May 28, at the Bank of Japan - Bank of Japan Institute of Financial Studies conference, Goolsby from the Federal Reserve stated that the energy inflation related to the Iran war has lasted longer than expected, causing stagflationary shocks to Asian economies. He mentioned that initial futures market forecasts believed energy prices would stay well below current levels, but the actual trend far exceeded market expectations.

Although recent signs of progress in US-Iran peace negotiations have caused oil prices to retreat, prices remain significantly above pre-war levels. Goolsby also issued a warning regarding Asian economies, noting that since these economies rely on energy imports, this shock resembles a traditional stagflationary impact.

The Fed May Raise Interest Rates

On the same day, Goolsby further emphasized that market expectations for AI-driven productivity gains are rising, which could push inflation higher and force the Fed and other central banks to hike rates.

He stated that the more intense the speculation about future productivity increases, the higher interest rates may need to be to prevent the economy from overheating. More importantly, in the short term, supply shocks—whether from oil prices, supply chain disruptions, or other factors—will make the situation more severe.

These comments further expand on Goolsby’s earlier public remarks this month, when he questioned the idea that AI could suppress inflation and create room for rate cuts. That view was favored by many officials in the Trump administration and the new Fed Chair Jeremy Wash.

Market Theory Shifts Toward Pre-Emptive Spending Inflation

Goolsby believes that if productivity improvements are already expected by the market, the actual situation may differ. The market might preemptively boost spending, driving up prices before the productivity gains materialize. This contrasts with the experience in the 1990s U.S., when widespread computer adoption unexpectedly boosted productivity, and market expectations did not anticipate the growth, thus avoiding inflation.

As an energy-importing country, Taiwan also faces energy inflation pressures. Goolsby’s warning suggests that if oil prices remain high, Taiwan’s inflation could last longer than expected, squeezing the central bank’s room to cut rates. Meanwhile, if the AI industry—an engine of Taiwan’s economic growth—has already reflected productivity expectations in the market, preemptively raising prices, Taiwan could face similar stagflation risks.

As US-Iran peace negotiations continue, markets should closely monitor whether supply shocks mentioned by Goolsby will persist into the third quarter, as this will influence the policy paths of global central banks.