Federal Reserve officials are pushing back against the argument that artificial intelligence will deliver enough productivity gains to justify keeping interest rates low, warning that the economic dangers are arriving faster than any benefits.
The debate centers on whether AI can boost worker productivity enough to let the economy grow without fueling inflation. Fed Chair Kevin Warsh has made the case that AI acts as a disinflationary force, a theory that could give policymakers more room to cut rates. But several officials say the evidence doesn't support betting the inflation fight on that gamble.
St. Louis Federal Reserve President Alberto Musalem laid out the skepticism bluntly in a recent speech. "I believe it would be risky to rely on the prospect of higher productivity growth in the future to solve our inflation problem today," he said. "AI shows great promise as a transformative technology, but the risks of a miscalculation about its impact on productivity and inflation are too great."
The immediate concern is that AI spending is driving up prices for chips, equipment and labor before any actual gains in output materialize. Fed Governor Lisa Cook highlighted the danger: companies have announced roughly $1.5 trillion in data center investment plans, creating pressure on construction labor, electricity and water prices alongside existing inflationary pressures from tariffs and international tensions.
San Francisco Federal Reserve President Mary Daly offered a historical parallel that captures the frustration. During the 1990s tech boom, productivity gains were "everywhere except in the statistics," she noted. This time around, the data shows productivity did pick up earlier, averaging 2.4% annually over the past three years compared to 1.5% in the previous decade. But linking that improvement directly to AI investments remains impossible.
"We've got the productivity surge a little bit earlier this time," Daly said. "But what's problematic is it's hard for economists or anyone to link it directly back to the AI investments. In fact, if you talk to companies, they say they haven't seen the productivity yet."
A survey from the World Economic Forum underscores the timeline problem. Economists now expect most sectors won't see meaningful AI-driven productivity improvements for at least another two years, a longer wait than they predicted at the start of 2026. Companies themselves have begun questioning whether enormous AI deployment costs are actually translating into efficiency gains.
Musalem's bottom line captures the Fed's dilemma: policymakers should focus on controlling inflation today rather than banking on productivity tomorrow. "At present, I believe we should keep our guard up against persistent above-target inflation today, rather than base monetary policy on the hope that we will have higher productivity growth tomorrow," he said.
Author James Rodriguez: "The Fed's caution is warranted. Betting on AI as an inflation cure when companies still haven't delivered measurable results is exactly how central banks get blindsided by sustained price pressures."
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