Beth Hammack warns AI inflation could force Fed to raise interest rates as demand stays insatiable

Cleveland Fed President Hammack sees AI fueling inflation, says rate hikes may be necessary

Inflation is too high and may need higher rates to bring it to target: Cleveland Fed's Beth Hammack Cleveland Federal Reserve President Beth Hammack said Tuesday that "insatiable" demand for artificial intelligence infrastructure is fueling inflation. Should that and other pressures continue to keep prices elevated, that could drive the need for higher benchmark interest rates, the central bank policymaker said in a CNBC interview. "We've got inflation that's too high, and it's been too high for the past five years," Hammack told CNBC's Sarah Eisen on the sidelines of the European Central Bank Conference in Sintra, Portugal. "When I look at policy, if that continues, it may mean that we need higher interest rates to bring inflation back down to target." Hammack honed in on AI spending, particularly citing a manufacturer in her district involved in electric switching for data centers. "What they say is that the demand is insatiable, that these companies -- these hyper scalers -- will pay almost any price for those inputs, and they need things built yesterday," she said. "When I look broadly, particularly around large companies, I'm not seeing a lot of restraint in the economy. I'm not hearing from these businesses that interest rates or credit spreads are a reason why they're holding back from investment and growth." The notion that AI could be fueling inflation runs against a key assertion from Fed Chairman Kevin Warsh, who believes that productivity gains from the technology will decrease the cost of labor and ultimately prove to be disinflationary. At the same time, Warsh, in his first news conference as head of the central bank, expressed firm commitment to bringing down inflation, something Hammack also emphasized. "If inflation continues to persist at these elevated levels and I don't see any restraint from policy, we may need to raise rates to bring that policy restraint in and to bring inflation back down," she said. Hammack is a voting participant this year on the rate-setting Federal Open Market Committee. The panel earlier this month voted again to keep its key overnight interest rate steady but penciled in a quarter percentage point increase this year, consistent with market expectations.

Fed's Beth Hammack Warns AI Spending Could Keep Inflation Hot and Force Interest Rates Higher: 'Not Seein

Cleveland Federal Reserve President Beth Hammack said Tuesday that surging demand for artificial intelligence infrastructure could add to inflationary pressures and may force the Federal Reserve to raise interest rates again if price growth remains elevated. Speaking to CNBC from the European Central Bank conference in Sintra, Portugal, Hammack said inflation remains above the Fed's 2% target and warned that persistent price pressures tied to AI spending could complicate monetary policy. "We've got inflation that's too high, and it's been too high for the past five years," Hammack told CNBC's Sara Eisen. "When I look at policy, if that continues, it may mean that we need higher interest rates to bring inflation back down to target". The Federal Reserve uses interest rates to manage inflation. Higher rates generally slow borrowing and spending, helping cool price growth across the economy. AI Demand Tests Fed's Inflation Fight Hammack pointed to aggressive spending on AI-related infrastructure, particularly data centers, as a sign that economic demand remains strong and could continue putting upward pressure on prices. She cited a manufacturer in her district involved in electric switching equipment for data centers and said demand remains unusually strong. "What they say is that the demand is insatiable, that these companies, these hyperscalers, will pay almost any price for those inputs, and they need things built yesterday," Hammack said. Big Tech Spending Shows No Restraint Hammack said she is not seeing much evidence that high borrowing costs are slowing corporate investment. "When I look broadly, particularly around large companies, I'm not seeing a lot of restraint in the economy," she said. Hammack's comments contrast with Fed Chair Kevin Warsh, who has argued AI could eventually reduce labor costs and become disinflationary through productivity gains. Hammack is a voting member of the Federal Open Market Committee this year. The Federal Open Market Committee kept rates unchanged earlier this month, though policymakers' latest projections indicated one quarter-point rate increase could still be possible later this year. Disclaimer: This content was produced with the help of AI tools and was reviewed and published by Benzinga editors. Image via Shutterstock Market News and Data brought to you by Benzinga APIs To add Benzinga News as your preferred source on Google, click here.