Fed Vice Chair says policy will now weigh energy and AI shocks
All Federal Open Market Committee members must factor energy price and AI developments into policy decisions effective immediately.
In a speech at Stanford University, Vice Chair Jefferson explained that the Federal Open Market Committee will explicitly incorporate the current energy price shock and the macroeconomic effects of artificial intelligence into its real-time policy analysis. The guidance applies to every FOMC participant as they set monetary policy consistent with the dual mandate of maximum employment and price stability.
Jefferson outlined a framework that classifies shocks as demand-side or supply-side, noting that the output gap - the difference between actual GDP and potential output - remains a central diagnostic tool. He emphasized that when a shock moves the output gap and inflation in the same direction, policy actions to address one objective automatically support the other, whereas opposing movements create a trade-off that requires weighing the relative costs of deviating from employment and inflation goals.
Applying this framework, Jefferson described the Middle East conflict as a supply shock that has raised oil prices, lowered real incomes and modestly tightened financial conditions. He observed that, despite the price spike, the United States is now a net oil exporter and that demand effects appear muted. At the same time, the unemployment rate sits near what most observers deem consistent with maximum employment, while inflation remains above the 2 percent target.
The Vice Chair also flagged artificial intelligence as a dual-sided shock. Survey data show rapid AI adoption, driving near-term investment and consumption while promising longer-term productivity gains that could raise potential output. He cautioned that if demand effects precede supply gains, inflationary pressure could rise, whereas earlier productivity improvements could ease price pressures. The timing of these effects, he said, will shape the Fed's stance on the neutral real interest rate.
Jefferson concluded that the confluence of energy and AI shocks heightens the risk of entrenched inflation and unanchored expectations, underscoring the need for the FOMC to assess each development within the broader economic context before adjusting policy.