Mary Daly, president of the Federal Reserve Bank of San Francisco, warns of an impending AI-fueled chip shortage that could significantly increase prices. This potential shortage is concerning because AI demand may extend beyond high-end chips, impacting supply chains for a prolonged period. Unlike typical supply shocks that fade within a few years, AI's pressure on technology prices might last longer. Businesses are already preparing by securing forward contracts for memory chips and re-engineering products to use fewer components. This proactive approach indicates growing concern about future supply constraints spreading broadly. The fear is that the demand for AI hardware could compete with chips needed for everyday items like cars and appliances, recreating post-pandemic bottlenecks. This scenario presents a challenge for the Fed, as companies driving the AI boom are less sensitive to interest rate hikes. While some hyperscalers might become more sensitive as they increase borrowing, other AI investors are more susceptible to rising rates. The AI boom poses a fresh inflation risk that could persist and be difficult for the Fed to mitigate with monetary policy alone. Daly supports recent interest rate hikes, but her future decisions will depend on whether inflation-driving shocks, including AI, energy costs, and tariffs, abate or compound.