U.S. Treasury Secretary Behnert stated that the surge in productivity induced by AI is currently suppressing prices from the supply side. He emphasized that core inflation is cooling down and that policymakers should not stifle growth potential because of short-term energy disruptions.

Source: Jinshi Data

U.S. Treasury Secretary Behnert called for the Federal Reserve to maintain an "open mind" when assessing inflation and interest rate paths, believing that productivity gains from artificial intelligence and regulatory relaxations could expand the supply capacity of the U.S. economy, thereby helping to suppress price pressures. His remarks come as the Federal Reserve has restarted interest rate hikes this month, and the market is reassessing the future tightening extent.

He cited the policy experiences of former Federal Reserve Chairman Greenspan, stating that Greenspan once allowed the economy to continue expanding in an environment of rapidly rising productivity.

"The Board of Governors and voting officials of the Federal Reserve should keep an open mind," Behnert said, linking his reasoning to the potential productivity improvements brought by deregulation. He believes that the U.S. economy is benefiting from tax cuts, regulatory relaxation, and productivity gains, and these supply-side changes should not be overlooked when judging potential inflation pressures.

Behnert Emphasizes Cooling Core Inflation

The focus of Behnert's speech 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, Behnert believes that core inflation, excluding food and energy, has performed relatively calmly. He stated that core inflation has been "very quiet" recently and has actually decreased over the past few months.

In August, the U.S. consumer price index excluding food and energy rose 0.3% month-on-month and increased 2.4% year-on-year. Although the core price increase is still above the Federal Reserve's long-term inflation target of 2%, Behnert's judgment is that energy shocks do not necessarily mean that underlying inflation pressures will also continuously increase.

This viewpoint contrasts with the recent policy actions taken by the Federal Reserve. In response to rising inflation risks, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75% to 4.00%, marking the first rate hike since 2023. Recently, several Federal Reserve officials have continued to emphasize inflation risks and believe that if price pressures cannot ease, monetary policy needs to remain sufficiently restrictive.

AI Productivity as a New Variable in Interest Rate Paths

Behnert particularly emphasized productivity this time because faster productivity growth could allow the economy to maintain a high growth rate while reducing the pressures of wage increases and demand expansion translating into inflation.

He compared the current development of artificial intelligence to the period in the 1990s when internet technology boosted U.S. productivity and believes that Federal Reserve Chairman Waller has already recognized this change. Behnert did not directly propose specific interest rate levels but argued that the Federal Reserve should take into account the effects of technological advances and regulatory changes on potential growth rates when judging whether the economy is overheating.

This has also further focused the current interest rate debate in the U.S. on one question: whether the recent price increases stem more from external supply shocks like energy or have spread to demand and core price systems.

Internally, the Federal Reserve has remained cautious on this issue recently. An economic analysis released by the Federal Reserve Bank of San Francisco this month noted 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.

Behnert, on the other hand, emphasizes that productivity gains could change the traditional relationship between growth and inflation. His remarks indicate that after the Federal Reserve has just restarted the interest rate hike cycle, the U.S. Treasury is taking a more cautious stance on the necessity of further tightening policies and hopes to leave room for policymakers to allow inflation to decline again and potential growth rates to improve.