Fed's Musalem says it's risky to bet that AI will ease inflation

St. Louis Federal Reserve President Alberto Musalem cautioned on May 28 that it would be premature for the U.S. central bank to assume artificial intelligence will reduce inflation by boosting productivity. Speaking at a Central Bank of Iceland and Northwestern University economic conference in Reykjavik, Musalem argued that inflation remains above target, labor markets are stable, and long-term inflation expectations are rising, making it risky to base policy on uncertain AI impacts. Musalem dismissed the idea of lowering interest rates in anticipation of future productivity gains, stating that the Fed’s current real policy rate is below its long-run neutral level. He warned that acting on faith in AI’s potential could backfire, potentially raising longer-term interest rates if markets doubt the Fed’s commitment to controlling inflation. This could stifle investment and harm economic growth. The Fed official joined others in pushing back against the notion that AI will automatically ease inflation pressures, a view held by some Trump administration officials and Fed Chairman Kevin Warsh. Musalem acknowledged that if evidence emerges proving AI significantly boosts productivity, he would reassess his stance. For now, however, he stressed the need for a cautious approach focused on restoring price stability. He also highlighted existing AI-driven demand pressures, such as increased consumption of chips and data centers, which could offset productivity benefits. Musalem’s remarks reflect broader skepticism within the Fed about relying on speculative technological advancements to address immediate economic challenges.