Torsten Slok said artificial intelligence costs could drive inflation and prevent Federal Reserve Chair Kevin Warsh from cutting interest rates quickly.
This perspective challenges expectations for rapid monetary easing. If AI-driven spending keeps prices high, the Federal Reserve may be forced to maintain restrictive rates longer than markets anticipate, impacting borrowing costs across the U.S. economy.
Slok discussed these projections during an appearance on CNBC’s “Squawk on the Street.” He said the initial build-out of AI technology will be inflationary in the early going, which would prevent Warsh from cutting interest rates as quickly as the chair has suggested should be possible.
The debate over the Fed's trajectory remains divided. While some analysts suggest AI will hinder cuts, other reports indicate Warsh may still slash rates despite a consensus view that hikes are more likely.
Current data shows the Federal Funds target rate range is between 350 to 375 basis points [1]. Some projections suggest a further increase of at least 25 basis points could occur in December 2026 [2].
These policy decisions are weighed against a massive balance sheet. Warsh has previously referenced a Fed balance sheet size of $6.7 trillion [3], a figure that complicates the process of tightening or loosening monetary policy without triggering market instability.
Slok's warning emphasizes the tension between technological advancement and price stability. The massive capital expenditure required for AI data centers and chips creates a demand surge that may keep inflation stubborn, effectively limiting the Fed's room to maneuver.
“The build‑out for artificial intelligence will be inflationary in the early going”
The conflict between AI investment and inflation creates a policy dilemma for the Federal Reserve. While AI promises long-term productivity gains, the immediate 'build-out' phase requires immense spending that can push prices higher. This suggests that the transition to lower interest rates may be slower and more volatile than expected, as the Fed must balance the risk of a recession against the risk of a new inflationary wave driven by the tech sector.
