Fed Governor Christopher Waller: The “AI boom” is a new driver of inflation! Does not rule out rate hikes in the short term

Fed officials issue cautious signals again! According to CNBC, Federal Reserve Governor Christopher Waller warned in a recent speech that policymakers should not “fight a war” as a reaction to past mistakes—overreacting to inflation; but he also pointed out that AI demand spillover effects have become a new root cause behind rising inflation. He emphasized that if inflation remains elevated, there is still a possibility of implementing further tightening policies (rate hikes) in the near term.
(Background: Fed semiannual report: Middle East conflict and an AI surge push inflation to 4.1%, with rates frozen at 3.5%-3.75%)
(Background addition: Fed official Kashkari changes course to a more hawkish stance, expecting one rate hike in 2026 “this year”)

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• Reject “fight a war,” but warn about possible rate hikes
• A new inflation variable: AI demand spillover effects
• Closely watch the June CPI; markets expect nearly a 40% chance of a rate hike in July

With the global macroeconomic landscape becoming increasingly complex and intertwined, the future direction of the U.S. Federal Reserve (Fed)’s monetary policy has once again become a focal point for the market. On July 13, 2026, Taipei time, Fed Governor Christopher Waller delivered a recent speech in New York, taking an extremely cautious stance toward the current stubborn inflation pressures. He said the Fed is balancing two major risks: it does not want to repeat the mistake of moving too slowly in 2021, yet it also does not want to trigger unnecessary economic tightening out of excessive anxiety.

Reject “fight a war,” but warn about possible rate hikes

In his speech, Waller admitted that in 2021, the Fed’s response to high inflation was indeed too slow, and that the internal decision was to avoid repeating that mistake. However, he issued a stern warning: “The urge to avoid past errors often creates new ones.” He urged policymakers not to “fight the last war” and instead not to raise rates reflexively right away.

Even so, Waller left room for policy tightening. He said that while there are “credible reasons” to believe inflation will cool, along with the fact that the current labor market is strong and inflation is not the main source, and that market inflation expectations remain quite stable; another equally reasonable scenario is that inflation could stay high or rise further. If the latter happens, this would force the Fed to restart tighter monetary policy in the short term.

A new inflation variable: AI demand spillover effects

When analyzing the causes of current inflation, Waller pointed to a new variable different from before. In addition to traditional factors such as energy price increases driven by the 2025 tariff policy and Middle East geopolitical conflicts, he particularly emphasized the “demand spillover effect brought by artificial intelligence (AI).”

He believes the explosive growth of the AI industry and infrastructure demand are becoming a key new source of stubborn inflation that remains above the 2% target. This shows that the capital expenditure frenzy by tech giants in the AI sector has begun to spread materially into the real economy and is generating inflationary pressure that cannot be ignored.

Closely watch the June CPI; markets expect nearly a 40% chance of a rate hike in July

For the next set of decisions, Waller stressed that the Fed must not become complacent and said bluntly that “just watching inflation until it melts on its own” is not a feasible option. As the U.S. Bureau of Labor Statistics is set to release the June Consumer Price Index (CPI), economists generally expect overall CPI to fall month-over-month by 0.2% due to lower oil prices, and to decline to 3.8% on an annualized basis; core CPI year-over-year is also expected to edge down slightly to 2.8%.

Waller said he would be very pleased to see core inflation decline, but because inflation has risen in the first half of the year, he needs to see “several consecutive months” of solid data before he can be confident that inflation is moving in the right direction; until then, he leans toward keeping the current interest rate target range unchanged. However, the market remains wary of potential tightening. As of July 13, Taipei time, according to CME Group’s FedWatch data, the market estimates the probability of the Fed raising rates at the end-of-July meeting at about 39%, and investors should closely monitor how subsequent inflation data will affect the pricing of risk assets.