Summary: J.P. Morgan Notes on the Week Ahead (Ep. 338)
Date: April 20, 2026 Presenter: Dr. David Kelly, Chief Strategist, J.P. Morgan Asset Management Topic: AI, Inflation, and the Future of Monetary Policy
I. Fed Leadership and Monetary Policy Transition
On Tuesday, April 21, 2026, the Senate Banking Committee will hold hearings for Kevin Warsh, the nominee for the next Fed Chair.
The Leadership Vacuum: Confirmation is expected to be delayed until the Justice Department’s criminal investigation into Jerome Powell is resolved.
The Warsh Strategy: Warsh has previously argued (Fox Business, Summer 2025) for reducing the Fed's balance sheet to create "leeway" for cutting short-term interest rates.
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The Counter-Argument: Dr. Kelly warns that shrinking the balance sheet on both sides of the ledger is complex and would likely raise long-term interest rates and mortgage rates, contrary to the administration’s pressure for lower borrowing costs.
II. Short-Term AI Impact: The "Inflationary Tsunami"
Dr. Kelly argues that AI is currently a mildly inflationary force because massive capital expenditure is hitting the economy before any productivity payoff is realized.
Energy Demand: U.S. electricity production rose 2.5% (2024), 2.4% (2025), and 3.0% YoY (March 2026). This is largely driven by data centers engaged in AI training and inference.
Direct Inflation Impact: Consumer electricity prices rose 4.6% YoY in March. Given its 2.5% weight in the CPI basket, this contributed 0.1% to the overall 3.3% headline inflation.
Supply Chain and Labor Costs: * Memory Chips: Soaring prices for AI hardware are increasing costs for manufacturers of laptops, smartphones, and autos.
Construction Wages: Wages in the sector rose 4.3% YoY (vs. 3.5% for all private sector workers) as the labor force grew by only 0.7% due to reversed immigration trends.
Macro Context: Inflation rose from 2.4% (March 2025) to 3.3% (March 2026). J.P. Morgan projects 3.6% for April. Current drivers include the Iran war, tariffs, and labor supply issues rather than AI demand.
III. The AI Labor "Scare Effect"
Dr. Kelly notes a psychological impact on the workforce:
Wage Growth: Economy-wide wage growth fell to an almost 5-year low in March.
Worker Passivity: Fear that AI will "take your job" is making workers less likely to demand higher pay, despite a growing number of AI-related layoff announcements and diminished entry-level hiring.
IV. Long-Term AI Potential: Structural Disinflation
In the long run, AI is expected to be significantly disinflationary through productivity gains and structural shifts.
Adoption Friction: Adoption lags potential due to organizational inertia and high enterprise costs. Kelly cites the pandemic-era video call adoption—the tech existed for years but required a catalyst for mass use.
Sector Adoption (March 2026):
High (>30% usage): Technology, Information, Financial, and Education sectors.
Low (<15% usage): Construction, Retail, Leisure and Hospitality, and Transportation.
Usage Velocity (Gallup): In Q1 2026, 50% of employees reported using AI (up from 21% in Q2 2023). Daily or multi-weekly usage jumped from 11% to 28%.
The "Invisible" Statistics: AI gains in medicine (diagnostics) and search quality are often unrecognized in official output/productivity stats. Conversely, statistics ignore negative externalities like increased isolation or political manipulation.
V. Three Pillars of Structural Disinflation
Decline in Labor Power: Union membership fell from 26% (1974) to 10% (2025). Major strikes (1,000+ workers) dropped from 424 to 30 annually. AI competition will likely further dampen wage growth.
Rising Inequality: The top 20% of households saw their pre-tax income share rise from 43.5% (1974) to 52.2% (2024). Wealthier households save more, diverting demand from consumer goods to asset prices (stocks/bonds).
Information Revolution: AI enhances price transparency, allowing buyers to compare prices more effectively and forcing sellers to keep prices low.
VI. Policy Conclusions and Investor Takeaways
Dr. Kelly argues there is no immediate case for Fed easing:
Inflation Targets: PCE inflation is estimated to hit 3.9% by May, nearly double the 2% target.
The "If" List: Inflation could reach 2% by early 2027 only if the Iran conflict resolves, oil prices fall, and the administration abandons plans to replace the struck-down IEEPA tariffs.
The Housing Myth: Unaffordability is caused by the Fed keeping rates too low for too long (between the GFC and the pandemic), which fueled the housing price boom.
Investor Message: The Fed cannot fix inequality or supply-side policy failures through rate cuts. Investors should look for a Fed that acknowledges AI’s long-term promise without overreacting in the short term.
Jun 2, 2026
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