Federal Reserve (Fed) Governor Christopher Waller delivered a speech in New York on July 13, warning that the “demand spillover effect” caused by the AI industry’s explosive growth has become a new root cause of persistent inflation remaining at stubbornly high levels. He also said that if inflation stays high or rises further, there is still a possibility in the near term of restarting a more hawkish monetary policy. According to CME FedWatch, the market currently estimates about a 39% chance of the Fed raising rates by the end of July.
Waller’s policy dilemma: avoid overreacting, but keep the option to raise rates
Based on the content of Waller’s speech, his policy stance clearly presents a dilemma framework. First, he acknowledges that moving too slowly in 2021 was a mistake, and the Fed is unwilling to repeat it. Second, he emphasizes that “the desire to avoid past mistakes often creates new ones,” urging policymakers not to react impulsively by raising rates immediately.
Waller also noted that “credible reasons” suggest inflation will cool, including a strong labor market that is not the main source of inflation and market inflation expectations being fairly solid. But he also conceded that an equally plausible scenario is inflation remaining high or climbing even further; if that happens, the Fed would restart a more restrictive monetary policy in the short term.
Waller bluntly said, “Simply watching inflation until it melts on its own is not a viable option.”
AI demand spillover effect: the inflation mechanism as tech giants’ capital expenditures spread into the real economy
According to Waller’s analysis, beyond traditional factors such as tariff policies in 2025 and energy price increases driven by geopolitical conflicts in the Middle East, he specifically pointed to a new variable: the “demand spillover effect brought by artificial intelligence.”
Waller said that the explosive growth of the AI industry and infrastructure demand are becoming a key new source driving inflation to remain stubbornly above the 2% target. This shows that the surge in tech giants’ capital spending in the AI space has begun to meaningfully spill over into the real economy, creating inflationary pressure that cannot be ignored.
This is the first time a Fed official in recent weeks has clearly identified AI capital expenditure as one of the inflation-driving factors, outside the standard inflation narrative.
Frequently Asked Questions
Did Christopher Waller explicitly imply a rate hike by the end of July?
Based on the speech, Waller did not explicitly signal a rate hike by the end of July. He said that before seeing “several months” of falling core inflation data, he leans toward keeping the current target range for the interest rate (3.50%-3.75%) unchanged. However, he retained the option of restarting a tightening policy if inflation remains high; CME FedWatch data shows the market expects about a 39% chance of a rate hike in July, with official Fed decisions being the deciding factor.
What exactly does the AI demand spillover effect refer to in Waller’s remarks?
According to Waller’s speech, the AI demand spillover effect refers to the large-scale infrastructure demand brought by the AI industry’s explosive growth (such as data centers, power, equipment investment, and so on). These tech giants’ capital expenditures have spilled into the real economy, driving up demand and prices for related raw materials, energy, and services—becoming a new root cause pushing inflation to stay stubbornly high.
How does the June CPI data affect the Fed’s policy outlook?
According to reports, the U.S. Bureau of Labor Statistics is set to release the June CPI. Economists generally expect total CPI to decline month over month by 0.2% due to lower oil prices, bringing the year-over-year rate down to 3.8%, while core CPI year-over-year should edge down slightly to 2.8%. Waller said the Fed needs “several months” of declining core inflation data before it can be confident inflation is moving in the right direction. After the June CPI is released, the market will reassess the probability of a rate hike in July based on official data.
