Fed's Cook Flags AI Buildout as a Key Inflation Risk for 2027

Federal Reserve Governor Lisa Cook on Thursday flagged the development of artificial intelligence as a primary inflation risk for 2027, citing potential supply chain pressures as the technology undergoes a rapid and resource-intensive expansion.

Supply-Side Pressures

Speaking at an event at the Federal Reserve Bank of New York, Cook warned that the AI buildout could create price pressures that last longer than anticipated. She noted that recent supply shocks have demonstrated more lasting effects on inflation than previously thought, making them a more critical factor in monetary policy decisions.

While acknowledging the long-term potential of AI, Cook's immediate concern focuses on the near-term demand for physical and energy resources required for its development. She also pointed to other potential threats to supply chains, including geopolitical factors like the conflict in the Middle East.

Productivity Gains Uncertain

Cook said she shares the common view among Fed officials that AI will eventually boost productivity, a development that would help reduce inflation. However, she expressed significant concern about the timing of these benefits, stating that the disinflationary productivity gains remain uncertain.

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The governor highlighted the difficulty in predicting when these productivity improvements will materialize and where future supply bottlenecks might emerge as the AI expansion continues. This uncertainty complicates the outlook for inflation and the appropriate path for monetary policy.

Context for Monetary Policy

Cook's comments provide insight into the forward-looking risks being considered by the central bank as it continues its fight against inflation. She participated in the unanimous vote last month to raise the Fed's policy rate by a quarter point in an effort to bring inflation back to its 2% target.

According to the source, the Fed's preferred inflation gauge stood at 3.4% in August and has remained persistently above the central bank's target for more than five years. Cook's focus on potential future supply shocks suggests the Fed remains vigilant about risks that could complicate its inflation mandate.