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

• Musalem pushed back against Trump administration and Fed Chairman beliefs that AI productivity gains could allow lower interest rates, saying the evidence on AI's impact on productivity remains unclear
• He warned that setting policy rates too low based on faith in AI could cause longer-term interest rates to rise if the public doubts the Fed's commitment to the 2% inflation target
• The Fed official said he would adjust his views if evidence emerges that higher productivity growth will ease inflation, but emphasized maintaining current vigilance is the better approach

Summary: Fed's Musalem Warns Against Relying on AI to Ease Inflation

Key Position: St. Louis Federal Reserve President Alberto Musalem warned on May 28 that the U.S. central bank should not ease monetary policy based on expectations that artificial intelligence will boost productivity and reduce inflation.

Main Arguments:

Musalem stated it would be "risky" to count on future AI-driven productivity gains to address current inflation challenges. He noted that with the real policy rate below the Fed's long-run neutral estimate, inflation "meaningfully above target," longer-term inflation expectations rising, and a stable labor market, maintaining vigilant monetary policy focused on restoring price stability is the better approach.

Market Context:

Musalem's remarks, delivered at a Central Bank of Iceland and Northwestern University conference in Reykjavik, push back against views held by some Trump administration members and Fed Chairman regarding AI's potential to enable lower interest rates. While acknowledging AI's evident impact on demand for chips and data centers, he emphasized that evidence of AI's productivity benefits remains unclear.

Key Risk:

He warned that setting policy rates too low prematurely could prove counterproductive, potentially causing longer-term interest rates to rise if markets doubt the Fed's commitment to achieving its 2% inflation target. This could "discourage investment and have detrimental effects on economic growth and employment."

Conditional Stance:

Musalem indicated willingness to adjust his policy views if clear evidence emerges that higher productivity growth will ease inflation pressures, but stressed that "the jury is out" on AI's ultimate impact on productivity.