St. Louis Federal Reserve Bank President Alberto Musalem stated that policymakers cannot count on a potential surge in productivity from artificial intelligence to alleviate high inflation.
In remarks prepared for a conference in Reykjavik, Iceland, on Thursday, Musalem said, "I believe it is risky to rely on the prospect of higher future productivity growth to address current inflation issues."
The conflict between the U.S. and Iran has intensified price pressures, prompting more policymakers to warn that further interest rate hikes may be necessary if inflation remains elevated. According to the minutes of the April 28–29 Federal Open Market Committee (FOMC) meeting, many officials had initially wanted to remove language from the Fed's post-meeting statement that suggested a "accommodative bias" in the direction of interest rates.
Musalem cautioned that, considering inflation, the Fed's benchmark interest rate is below the so-called "neutral rate"—a level that neither slows nor stimulates the economy. He also noted that the labor market is stable, inflation is "significantly above" the Fed's 2% target, and long-term inflation expectations "are rising."
Data released on Thursday reinforced these concerns. Figures from the U.S. Bureau of Economic Analysis showed that the PCE price index, the Fed's preferred inflation measure, rose 3.8% in the 12 months through April.
Futures contract pricing indicates that investors are betting on a more than 50% chance of a Fed rate hike by the end of the year. The Fed's next policy meeting is scheduled for June 17–18, which will be the first meeting chaired by new Fed Chair Kevin Wash.
Wash believes that artificial intelligence holds the potential to deliver a significant boost in productivity, enabling growth without fueling inflation and leading to lower interest rates.
The St. Louis Fed president stated that he is a dedicated user of AI and is optimistic about its potential to boost the economy. However, he argued that growing enthusiasm for the technology is driving up demand for electricity and chips, as well as the stock prices of certain AI companies. In the absence of evidence that productivity gains are helping to reduce inflation, this could prompt central banks to raise policy rates.
Musalem said, "The data show that the probability of the U.S. currently being in a period of high productivity growth is well below 50%. I believe we should formulate monetary policy based on stronger evidence."
During a Q&A session after his speech, when asked under what circumstances he would support a rate hike, Musalem noted that risks currently lean more toward inflation than employment, and he would be concerned if price pressures persist.
Musalem said, "I believe there is a scenario where a rate hike may be necessary. If inflation does not decline over the next one or two quarters, I would be concerned. Similarly, if I see inflation expectations continue to rise or remain elevated, that would also concern me."
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