Reykjavik - St. Louis Federal Reserve President Alberto Musalem on Thursday pushed back on the idea that artificial intelligence-driven productivity gains will solve current inflation pressures, saying policymakers should not relax monetary policy on the strength of those expectations.
Addressing an economic conference co-hosted by the Central Bank of Iceland and Northwestern University in Reykjavik, Musalem outlined several reasons the present environment argues against shifting to easier policy. He noted that the real policy rate remains below the Fed's notion of the long-run neutral rate, inflation continues to run meaningfully above the 2% target, longer-term inflation expectations are drifting higher, and the labor market remains firm.
Given those conditions, Musalem said preserving vigilant monetary policy aimed at restoring price stability is preferable to relying on the prospect that higher productivity from AI will, in the future, bring inflation back under control.
He aligned with other officials within the Federal Reserve who have been skeptical of optimistic takes that AI will materially raise productivity to a degree that allows the central bank to set interest rates lower. Musalem specifically positioned himself against views held by many members of the Trump administration and Fed Chairman Kevin Warsh that expect substantial productivity uplift from AI to ease the path for looser policy.
Musalem did leave room to change his stance if clear evidence emerges that AI delivers sustained productivity gains that would reduce inflationary pressures. For now, he said, the jury remains out on how much AI will add to productivity, even as signs of increased demand for chips and data center capacity are already visible.
The Fed official warned of a specific risk if policymakers move or keep policy rates too low: longer-term interest rates could rise if the public begins to doubt the Fed's resolve to return inflation to the 2% target. Such a rise in longer-term rates would, he said, discourage investment and could weigh on economic growth and employment.
Context and implications
- Musalem emphasized price stability as the priority in the current macroeconomic environment.
- He signaled openness to revising his view only if clear, sustained productivity improvements attributable to AI become evident.
- He identified a potential transmission channel from too-loose policy to higher long-term rates and weaker investment and labor market outcomes.