Federal Reserve Governor Lisa Cook said in Oakland that the number and magnitude of future adjustments to the Fed funds rate will depend on inflation and labour market data, as well as the economy’s reaction to the Fed’s actions to date. She also said she is watching whether artificial intelligence could cause a temporary rise in unemployment, and she warned that the Fed has limited tools in such a scenario, since rate cuts could add to inflation pressure.
Cook said she expects inflation pressures to build in coming months from AI and conflict in the Middle East, including the US-Iran conflict. She referred to economy-wide pressure from AI-fuelled demand and said there are signs in the inflation data that pressure is broadening this year, with any gains from AI not arriving in time to offset that trend. She also said there is limited evidence so far that AI is changing the labour market’s structure, while expressing hope that the pace of AI adoption will minimise net job losses.
Policy Response and Portfolio Hedging
With Fed Governor Lisa Cook warning of broadening inflation from AI and Middle East conflicts, we must prepare for interest rates to stay higher for longer. This hawkish outlook means we should pivot away from expecting aggressive rate cuts in the coming weeks. Instead, we need to focus on hedging against sticky inflation and potential labor market disruptions.
The escalating US-Iran conflict has already pushed Brent crude prices into volatile territory, threatening to drive the Consumer Price Index (CPI) back toward 3.5%. Historically, geopolitical shocks in the Middle East cause sudden spikes in energy derivatives, making long call options on crude oil an attractive hedge. We recommend utilizing these energy options to protect broader portfolios from sudden inflation shocks.
Structural Inflation, Market Strategies, and Volatility
AI-fueled demand is not just a tech story; it is actively straining our energy grids and driving up economy-wide commodity prices. Recent industry data shows electricity demand from data centers is projected to grow by up to 15% annually through the end of the decade, which acts as a structural driver for inflation. Derivative traders should look at going long on commodities and utility-focused swaps to capitalize on this massive infrastructure build-out.
Because the Fed has limited tools to combat AI-related job shifts without fueling inflation, short-term rate cuts are highly unlikely. We suggest shorting short-duration Treasury futures or buying put options on long-term Treasury ETFs. Betting on higher-for-longer yields is the most logical path as bond market volatility remains elevated.
Given the dual threats of Middle East escalation and tech-driven structural shifts, we expect equity market volatility to climb. Using straddles on major index options, like the S&P 500, will allow us to profit from sharp market moves regardless of the direction. Positioning for these swings now is crucial before the next round of inflation and employment data is released.
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