Cleveland Fed President Says Massive AI Infrastructure Demand Could Lead to U.S. Rate Hikes

[Financial News] Beth Hammack, president of the Federal Reserve Bank of Cleveland, warned that huge demand for artificial intelligence (AI) infrastructure could fuel inflation and give the Federal Reserve System (Fed) a reason to raise interest rates.
On the 30th local time, CNBC reported that Hammack said in an interview in Sintra, Portugal, where she was visiting to attend a European Central Bank (ECB) forum, that demand for AI infrastructure was "endless" and could lead to inflation and higher rates.
She noted that current inflation is still too high and has remained elevated for the past five years. "If that trend continues, higher rates may be needed to bring inflation back to target," she said.
Hammack also voiced concern about overheated investment in the AI sector, citing a maker of power equipment for data centers in her district.
She said hyperscalers have such strong demand that they are willing to pay huge sums for power equipment. "I have not heard them say they want to curb investment or growth because of high rates or credit spreads," she said.
Still, Hammack left room for caution, saying that "AI's impact on the broader economy could show up as both higher and lower inflation."
Her view that AI could stoke inflation stands in sharp contrast to a core argument from Kevin Warsh at the Fed. Warsh believes that productivity gains from AI adoption will lower labor costs and, in turn, act as a disinflationary force that helps stabilize prices.
In his first press conference after taking office, Warsh showed a firm commitment to bringing down inflation, and Hammack pointed to that advantage.
Hammack warned that "if inflation remains persistently high and monetary policy is not having a restraining effect, we may need to raise rates to impose policy restraint and bring prices down again."
Hammack has voting rights on the Federal Open Market Committee (FOMC) this year.
The Fed held rates steady at its June FOMC meeting, but signaled the possibility of a 0.25 percentage point increase later this year, in line with market expectations.
jjyoon@fnnews.com Yoon Jae-joon Reporter