Federal Reserve Governor Lisa Cook on Wednesday said she feels the U.S. central bank should hold short-term interest rates steady for now but, with tariffs, the Iran war and a surge in AI-related investment pushing prices higher, she is prepared to hike rates if needed.
"I see elevated risks to both sides of our mandate, and from a risk-management perspective, I currently believe that the right course of action is to hold rates steady," Cook said in remarks prepared for delivery at a policy forum on AI at Stanford's Institute for Economic Policy Research.
But inflation, she said, is "clearly moving in the wrong direction," driven higher by last year's tariffs - an effect that should abate soon, she said - but also by oil prices that have surged since the February 28 start of the Iran war, and by a jump in demand for chips and software and upward pressure on construction worker wages as investment in AI data centers charges ahead.
And while she expects inflation to ease in coming months without having to raise rates, she worries that after five years of inflation running above the Fed's 2% target, it could work its way more persistently into price- and wage-setting behavior.
"I want to be clear about my risk assessment: The risks remain tilted toward higher inflation," she said. "I am prepared to raise rates, if the expected disinflation does not appear in a timely manner."
Cook, whom President Donald Trump tried to oust last year in a case now before the Supreme Court, voted with the majority at the Fed last month to hold the policy rate steady in the 3.50%-3.75% range.
But her openness to a possible rate hike poses a potential challenge for new Fed Chair Kevin Warsh, whom Trump put in the job with the expectation he will lower interest rates, at least once the Iran war ends and energy prices ease. A number of other Fed policymakers have also signaled they feel a rate hike could be needed.
While overall she is optimistic that companies' rapid adoption of artificial intelligence will boost economic growth and productivity, she feels it could lead to job losses before any job gains, posing a downside risk to an otherwise stable job market.
Still, Cook said, she believes the labor market will remain stable without having to lower interest rates, though she added that she would be prepared to lower rates if the job market deteriorates. The unemployment rate in April was 4.3%.
