Williams flags AI-driven demand as key inflation risk

New York Fed President John Williams said demand linked to artificial intelligence has become the inflation pressure he is watching most closely, Bloomberg reported. He said sustained AI-driven demand that pushes prices higher could require the Federal Reserve to respond with tighter monetary policy.

Williams, speaking Thursday at an event hosted by the New York Fed, said the central bank should not dismiss an AI-related boost to demand if it proves durable relative to supply. If inflation runs above his baseline outlook in a persistent and meaningful way, he said, monetary policy would have to react.

He also said the Fed remains in a strong position if inflation develops more favorably. Williams is president of the New York Fed and vice chair of the Federal Open Market Committee, the Fed panel that sets interest rates.

Williams pointed to core PCE, the Fed’s preferred measure of underlying inflation, as a key test for the second half of 2026. He said monthly readings of 0.2% for core PCE over that period would fit with his view that inflation is still slowing toward the Fed’s 2% annual target.

Readings above that pace would indicate price pressures are proving more stubborn, Williams said. The Fed has held its benchmark interest rate steady so far this year, according to Bloomberg, even as more officials have begun to signal openness to higher rates.

In the Fed’s latest economic projections, submitted at the June meeting, nine policymakers penciled in at least one quarter-point rate increase for 2026, Bloomberg reported. Minutes from that meeting, released Wednesday, showed that a few participants believed there was a case for raising rates in June.

The minutes also showed officials discussed how they would respond under different inflation outcomes. Williams said that discussion reflected the Fed’s shared policy framework and showed the range of scenarios officials are considering.

Chairman Kevin Warsh has called for a new approach at the central bank, Bloomberg reported. Warsh has announced task forces to review Fed communications, the balance sheet and inflation models, along with work on issues such as productivity and data sources.

Those task forces are expected to report suggested changes in about six months, according to Bloomberg. Williams described the effort as a timely chance to examine major parts of the Fed’s work and said the schedule for producing recommendations is aggressive.

This story draws on original reporting from Fortune.