Federal Reserve identifies AI infrastructure demand as major inflation threat amid rate hike concerns

New Fed task force members share Chairman Kevin Warsh's embrace of AI

Warsh has been personal friends with Andreessen for decades. Warsh also ran venture-capital investments for investor Stanley Druckenmiller after a stint at the Fed that ended in 2011. That expanded his Silicon Valley network -- and his wealth. Andreessen made a fortune creating some of the internet's earliest web browsers and is now one of AI's most vocal evangelists. "We've turned sand into thought," Andreessen told podcaster Joe Rogan in May, referencing the silicon that is the physical basis for AI chips. Jones, the economist, shares much of Andreessen's West Coast optimism. Jones recently went on leave from Stanford University to join the Anthropic Institute, part of leading AI firm Anthropic. Jones's academic work recently has focused on the effects of AI on economic growth, making him an important voice in Warsh's efforts to bring the Fed around to his point of view. Jones noted in a recent paper that U.S. growth per capita has consistently averaged 2% over much of U.S. history. "Nevertheless, if AI eventually automates away nearly all the weak links in the economy, economic growth could accelerate significantly, with rates potentially exceeding 5 percent per year," he wrote. The paper analyzes what Jones identifies as weak links -- aspects of the economy that will be difficult to automate -- and considers lower potential growth rates as well. But Jones writes bluntly that AI "will likely be the most transformative technology of the modern era." Sharma, who in February became CEO of Microsoft's Xbox gaming business, has made strong statements in support of AI. But as the leader of an operating business, she made the rare decision not to prioritize AI. Even as Microsoft incorporates AI into all aspects of its products, Sharma opted not to put it front and center on Xbox, she said in a recent Bloomberg interview. "Our console players aren't excited about that experience," Sharma said. But that doesn't make her a skeptic. "Now, do I believe in AI? Absolutely," she said. The three task force members didn't immediately respond to a request for comment. The Fed declined to comment. Where Warsh may encounter skeptics is on the Federal Open Market Committee, which has the power to set interest rates. FOMC members discussed at its June meeting the question of whether AI can raise productivity, minutes from the discussion released this week show. Some FOMC participants bought into the idea that productivity would speed up, the minutes said. And yet they weren't fully sold. "These participants remarked, however, that considerable uncertainty remained regarding both the timing and magnitude of potential productivity gains, which were expected to lag the ongoing boost of AI adoption on demand." Meanwhile, U.S. tech firms' headlong embrace of AI is starting to heat the economy. New York Fed President John Williams on Thursday said he was concerned about price increases in electricity and semiconductors from the AI boom. Prices have risen like a "hockey stick," with some components doubling and tripling, Williams said. AI is a "demand shock," he said, adding that it is unclear if supply will grow alongside it, which would be necessary to keep inflation down. The Fed meets again at the end of July, when it is expected to hold interest rates steady. The task forces are expected to finish their work by the end of the year.

Fed's Williams says AI is now his main inflation concern | Fortune

Federal Reserve Bank of New York President John Williams said that among the drivers of inflation in the US, he's most focused on demand driven by artificial intelligence. And if that demand persists, it could force the central bank to raise interest rates. "If this creates a sustained impulse to demand relative to supply in inflation, I do think that's the kind of situation where you don't look through this," Williams said Thursday during an event organized by the New York Fed. If inflation ends up being more persistent and meaningfully higher than his baseline forecast, he said, "then monetary policy would need to respond to that." "On the other hand, if it isn't and things play out in a more benign way, I do think monetary policy is, and continues to be, well positioned," he said. As he monitors inflation, Williams said if the Fed's preferred gauge of underlying price pressures -- the so-called core version of the personal expenditures price index -- comes in at a monthly pace of 0.2% over the second half of 2026, that would suggest inflation is on track to return to the Fed's 2% annualized target. "A rate of core PCE of two-tenths a month in the second half of this year, that would be consistent with my view of a disinflationary process that's continuing," Williams said. "If it's higher than that, that would be a sign of inflation a bit more persistent." The Fed has kept its benchmark rate steady this year, but support for rate hikes is growing among officials. Nine policymakers penciled in at least one quarter-point hike in 2026 in their latest set of economic projections submitted at their June gathering. At the same meeting, a few participants saw a case for raising interest rates, according to minutes released Wednesday. The minutes revealed that policymakers had discussed how they would want to respond to various scenarios for future inflation. Williams said the exercise, and the details provided by the minutes, captured a "collective reaction function," referring to the framework through which the central bank thinks about the economy and how to respond to certain conditions. "It shows the richness of these scenarios," he said. Chairman Kevin Warsh has touted the need for a new approach at the Fed, announcing task forces to review the central bank's communications, balance sheet and inflation models as well as to study key issues such as productivity and data sources. The task forces would have around six months to deliver a set of suggested changes, the new chairman said. The New York Fed chief, who is also vice chair of the Federal Open Market Committee, said the task forces were a "unique and timely" opportunity to think about key areas for the central bank. "It's a pretty aggressive timeline of trying to get those reports back to us," Williams added.

Fed Blames AI Demand Boom for Rising US Inflation

Ongoing strong demand for AI infrastructure "would likely sustain upward pressure on prices for technology products and electricity," Federal Reserve policymakers said. Federal Reserve officials were split last month on whether to increase interest rates or keep them steady, with many seeing accelerating demand for artificial intelligence as a driver of inflation, according to meeting minutes released on Wednesday. The minutes covered the first monetary policy meeting under Fed Chair Kevin Warsh. Many Federal Open Market Committee members said that "ongoing strong demand for AI infrastructure would likely sustain upward pressure on prices for technology products and electricity," according to the minutes. AI-related inflationary pressure, colloquially known as "chipflation," stems from the rising cost of semiconductors used by data centers. This surge in demand, along with data center competition for energy, has pushed up consumer prices for a wide range of electronic goods, devices and power, and may continue as AI demand increases. Higher inflation is generally bad news for risk assets such as crypto, as it results in lower liquidity and spending power and higher interest rates, making borrowing more expensive and cash investments more attractive. Inflation will remain elevated in the near term Participants anticipated that inflation would "remain elevated in the near term" but may decline as the Middle East conflict eases. However, they judged that the "risks to the inflation outlook were still tilted to the upside." AI growth remained a strong theme, both boosting economic growth and contributing to inflation at the same time. "Most participants remarked that growth in economic activity that exceeded that of potential output, owing in part to strong AI business investment, could contribute to more persistent inflationary pressures." The Fed's "dot plot" signals hikes, not cuts, with nine of 18 voting members projecting at least one rate hike before the end of 2026 and six expecting two 25-basis-point increases. The central bank's PCE inflation projection for year-end also jumped from 2.7% to 3.6%. A hawkish dot plot signals that interest rates are likely to stay higher for longer this year. Source: Federal Reserve The Fed kept rates steady at 3.5% to 3.75% at its June meeting, while CME futures markets currently show a 70% probability that they will remain unchanged at the next meeting on July 29. AI infra buildout driving higher inflation Nick Ruck, director of LVRG Research, told Cointelegraph that the Fed's recent meeting highlights how the massive AI infrastructure buildout is "driving higher inflation through surging demand for semiconductors, energy and data centers, even as it promises future productivity gains." "While this short-term pressure complicates monetary policy, it also underscores the need for innovative solutions in decentralized technologies to optimize resource allocation and ease bottlenecks in the digital economy," he said. Analysts said this week that crypto markets could benefit from any Fed intervention to backstop the booming US equity market in a downturn.

AI Making Life More Expensive for You? Federal Reserve Says 'Upward Pressure' Likely to Sustain for Now

The Federal Reserve said that artificial intelligence was a contributing factor to inflation in its June meeting minutes and cited "AI-related price pressures" as a driver of core goods inflation. Fed Points to AI-Related Price Pressures The Fed added that while AI could eventually boost productivity and help ease inflationary pressures, "this effect would likely take time to materialize." "Ongoing strong demand for AI infrastructure would likely sustain upward pressure on prices for technology products and electricity," the Fed said. Bull Theory Says AI Is Fueling Inflation Market research platform Bull Theory, in a post on X on Wednesday, said the AI boom that has lifted semiconductor stocks 220% this year is also driving up the cost of chips, memory, electricity and data center construction. "AI is contributing to inflation right now," the market researcher said, adding that productivity gains from AI are likely years away, keeping interest rates higher for longer. "Higher rates are the single biggest risk to the AI valuations the market has been pricing in all year," it added. Rate Cuts Could Take Longer to Arrive The Fed's Desk survey showed that interest rates were expected to remain unchanged through early 2027, while market pricing expected one rate hike by mid-2027. Last week, Cleveland Fed President Beth Hammack said that surging demand for AI infrastructure could add to inflationary pressures and potentially require higher interest rates if price growth remains elevated. "When I look broadly, particularly around large companies, I'm not seeing a lot of restraint in the economy," she said, adding that hyperscalers "will pay almost any price" for critical data center equipment. Disclaimer: This content was produced with the help of AI tools and was reviewed and published by Benzinga editors. Image via Shutterstock/ Andrii Yalanskyi Market News and Data brought to you by Benzinga APIs To add Benzinga News as your preferred source on Google, click here.