Fed’s Musalem warns against betting AI will ease inflation

TL;DR:

• St. Louis Federal Reserve President Alberto Musalem argued it would be “risky” to ease monetary policy on the assumption that AI-driven productivity gains will bring inflation down.
• He is the latest Fed official to push back on a view embraced by the Trump administration and Fed Chair Kevin Warsh that AI could justify lower interest rates.
• Musalem said cutting rates too far on faith in future AI gains could backfire, pushing long-term rates up if markets doubt the Fed’s commitment to its 2% target.

A senior US central banker has put a sceptical marker down on one of the AI economy’s most consequential claims: that surging productivity will tame inflation. Speaking to an economic conference in Reykjavik, Alberto Musalem argued that with inflation above target and expectations drifting higher, relying on a hoped-for productivity boom to fix today’s inflation would be a mistake.

The policy fault line

Musalem’s caution sits against an unusually political backdrop. The idea that AI will lift productivity enough to allow lower interest rates is, as Reuters notes, a core belief of many in the Trump administration and one shared by Fed Chair Kevin Warsh. Musalem’s intervention — explicitly framed as the view of “the latest” dissenting policymaker — signals a genuine split inside the Fed over how much weight to place on AI’s still-unproven macroeconomic payoff.

His argument is sequencing, not denial. He said he would adjust his views “if the evidence becomes clear” that higher productivity is easing price pressures, but that the jury remains out even as AI’s demands for chips and data centres are already visible. Acting on faith, he warned, could be counterproductive: holding rates too low risks pushing up long-term borrowing costs and discouraging investment if the public questions whether inflation will return to 2%.

Looking forward

The debate is not confined to Washington. The Bank of England faces the same unresolved question — how much, and how quickly, AI will lift UK productivity, which has lagged for over a decade — and the same temptation to bank gains before they appear. Musalem’s warning is a useful counter-narrative for UK business leaders and policymakers alike: the AI productivity story may prove real, but treating it as a present-day fact rather than a future possibility is where the risk lies.