Becerra: AI May Alleviate Price Pressures, Fed Should Maintain an Open Stance on Inflation

U.S. Treasury Secretary Becerra stated that the productivity surge driven by AI is suppressing prices from the supply side. He emphasized that core inflation is cooling, and decision-makers should not stifle growth potential due to short-term energy disruptions.

Treasury Secretary Becerra urged the Federal Reserve to maintain an "open stance" when assessing inflation and interest rate paths, believing that the productivity gains brought by artificial intelligence and regulatory easing could expand the supply capacity of the U.S. economy, thereby helping to alleviate price pressures. His remarks come as the Federal Reserve has restarted interest rate hikes this month, prompting the market to reassess the future tightening pace.

He referenced the policy experiences of former Fed Chairman Greenspan, stating that Greenspan allowed the economy to continue expanding in an environment of rapid productivity growth.

"The Federal Reserve Board and voting officials should maintain an open attitude," Becerra said, linking this reasoning to the potential productivity improvements brought by regulatory easing. He believes that the U.S. economy is benefiting from tax cuts, regulatory easing, and productivity improvements, and these supply-side changes should not be overlooked when judging potential inflation pressures.

Becerra Emphasizes Cooling Core Inflation

The focus of Becerra's remarks was to distinguish between energy price shocks and broader underlying inflation pressures. This year, energy prices have risen significantly due to factors such as the situation in the Middle East, with gasoline and diesel prices climbing, increasing the cost of living pressures faced by U.S. consumers and reinforcing market concerns about the persistence of inflation.

However, Becerra believes that core inflation, excluding food and energy, has been relatively mild. He stated that core inflation has been "very calm" recently and has actually declined over the past few months.

In August, the consumer price index excluding food and energy rose by 0.3% month-on-month and 2.4% year-on-year. Although the core price increase is still above the Fed's long-term inflation target of 2%, Becerra's judgment is that energy shocks do not necessarily mean that underlying inflation pressures will continue to increase simultaneously.

This view contrasts with the recent policy actions taken by the Federal Reserve. In response to the renewed rise in inflation risks, the Fed raised the federal funds rate target range by 25 basis points to 3.75% to 4.00% this month, marking the first rate hike since 2023. Recently, several Fed officials have emphasized inflation risks and believe that if price pressures cannot be alleviated, monetary policy needs to remain sufficiently restrictive.

AI Productivity Becomes a New Variable in Interest Rate Path

Becerra particularly emphasized productivity because faster productivity growth may allow the economy to maintain a high growth rate while reducing the pressure of wage increases and demand expansion translating into inflation.

He compared the current development of artificial intelligence with the period in the 1990s when internet technology drove productivity increases in the U.S., and believes that Fed Chair Waller has already recognized this change. Becerra's remarks did not directly propose specific interest rate levels but advocated that the Fed should consider the impact of technological advancements and regulatory changes on potential growth rates when assessing whether the economy is overheating.

This also further focuses the current debate on U.S. interest rates on one question: whether the recent price increases are primarily due to external supply shocks such as energy, or whether they have already spread to demand and core price systems.

The Fed remains cautious on this issue. An economic analysis released by the San Francisco Fed this month pointed out that the U.S. economy continues to expand at a relatively robust pace, with labor productivity growth accelerating, but inflation remains above the 2% policy target.

Becerra, however, emphasizes that productivity improvements may change the traditional relationship between growth and inflation. His remarks indicate that after the Fed has just restarted the interest rate hike cycle, the U.S. Treasury Department holds a more cautious attitude towards the necessity of further tightening policies and hopes that policymakers will retain space for inflation to decline again and for potential growth rates to increase.

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