St. Louis Federal Reserve President Alberto Musalem on Thursday cast doubt on the expectation that artificial intelligence will lower inflation by boosting productivity, explicitly opposing any Fed monetary easing based on this premise. This stance introduces new internal resistance within the Fed against the AI-driven growth narrative favored in Washington.
Speaking at a joint conference hosted by the Central Bank of Iceland and Northwestern University in Reykjavik, Musalem noted that the current real policy rate remains below the Fed's estimate of the long-term neutral rate, with inflation significantly above target and long-term inflation expectations showing signs of upward drift.
Relying on the yet-unrealized productivity prospects of AI to curb inflation at this juncture would be a risky move, Musalem argued.
He further warned that if premature rate cuts lead the public to doubt the Fed's ability to bring inflation back to the 2% target, long-term interest rates could instead be pushed higher, ultimately suppressing investment, harming economic growth and employment, and producing counterproductive policy outcomes.
Divergence Within the Fed Over AI's Inflation Impact
Musalem is the latest Fed official recently to express skepticism toward the AI productivity narrative. This narrative, endorsed by the Trump administration and Fed Chair Wash, suggests that AI-driven productivity gains could create more room for interest rate cuts.
However, Musalem adopted a more cautious tone. He acknowledged that AI's boosting effect on demand for chips and data centers is already evident, but stated that "how much AI will contribute to productivity remains an open question."
He indicated that if clear evidence emerges in the future showing that productivity improvements will genuinely alleviate inflationary pressures, he would be willing to adjust his policy stance accordingly. Until then, policy should be based on existing facts rather than future expectations.
"Maintaining Prudence" as the Optimal Current Approach
Facing a macroeconomic environment with multiple constraints, Musalem clearly expressed a preference for maintaining policy steadiness.
In his remarks, he pointed out that the more prudent path at present is to adhere to a cautious monetary policy stance centered on restoring price stability, rather than prematurely factoring unproven technological benefits into the policy framework.
He elaborated on the potential harms of easing too soon: if policy rates are pushed too low, it could undermine market confidence in the Fed's commitment to its inflation target, thereby raising long-term rates and creating a scenario where financial conditions tighten in reverse, harming the real economy as much as inflation itself.
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