Fed Officials Warn AI Boom Could Sustain Inflation

Two Federal Reserve officials have raised concerns about the growing role of artificial intelligence as a new driver of inflation, complicating the central bank's efforts to control price pressures. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, warned that AI is contributing to inflation through increased demand for data centers and semiconductors, posing a challenge to the Fed's 2% inflation target. He emphasized that the Fed's credibility is at stake as it navigates these economic pressures, with energy prices and AI-driven demand being significant factors.

Schmid noted that inflation remains "frustrating" and that the Fed still has work to do on short-term rates, despite rising long-term yields. He highlighted the difficulty of achieving a soft landing, where inflation is brought down without tipping the economy into a recession. The influence of hyperscale companies on goods prices adds another layer of complexity to the Fed's monetary policy decisions.

Mary Daly, president of the Federal Reserve Bank of San Francisco, echoed these concerns, stating that AI-induced chip shortages could push prices higher and have far-reaching effects beyond the data center boom. Daly warned that the combined impact of AI, tariffs, and higher energy costs could reinforce one another, keeping inflation elevated for a longer period than usual. She noted that the demand for AI is rising, not falling, and that companies are already preparing for tighter chip supplies, which could affect procurement and product design decisions across industries.

Daly supported the Fed's recent rate hike and indicated that further rate hikes may be necessary depending on the evolution of tariffs, oil prices, and the impact of AI. She cautioned that if these factors prove to be more persistent than expected, they could significantly alter the inflation outlook.