A growing divide is emerging within the US Federal Reserve as more policymakers warn that interest rates may need to rise again if inflation fails to cool in the coming months, as per a report by Reuters.
The comments from policymakers come at a delicate moment for the US economy, where inflationary pressures have intensified due to rising energy prices linked to the ongoing Iran conflict. Policymakers continue to debate the economic impact of artificial intelligence and productivity growth.
St. Louis Federal Reserve President Alberto Musalem said that the inflation outlook has become increasingly concerning and suggested that a rate hike could be warranted if disinflation stalls over the next few quarters. Speaking at an economic conference in Reykjavik hosted by the Central Bank of Iceland and Northwestern University, Musalem said the risks now appear more skewed toward inflation than labor market weakness.
His remarks followed fresh data showing that the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 3.8% in April from a year earlier, marking the fastest pace in three years. Higher energy costs tied to the Iran war played a major role in the increase.
Federal Reserve Governor Lisa Cook echoed similar concerns earlier in the week. While she maintained that keeping rates unchanged remains appropriate for now, she also indicated that policymakers should be prepared to tighten monetary policy if inflation does not moderate quickly enough.
New York Fed President John Williams also reiterated that current policy settings remain appropriate, but noted that persistently elevated inflation could ultimately require higher interest rates, according to Reuters.
The increasingly hawkish tone among several Fed officials could create complications for Federal Reserve Chair Kevin Warsh ahead of next month’s policy meeting, his first since taking over the central bank. President Donald Trump had selected Warsh partly on expectations that he would support lower borrowing costs to stimulate economic growth.
Warsh has previously argued that advances in artificial intelligence could help improve productivity and reduce inflationary pressures over time, potentially creating room for rate cuts. He has also suggested that any easing cycle could be paired with reductions in the Fed’s balance sheet.
However, the recent surge in fuel and gasoline prices has complicated that outlook. Policymakers are now debating whether higher energy costs, combined with tariff-driven price pressures, could spread more broadly across the economy and keep inflation elevated for longer.
At least six of the Fed’s 19 policymakers last month supported removing language from the central bank’s policy statement that implied rate cuts remained the most likely next step. Instead, they wanted the statement to reflect that a rate hike was equally possible. Musalem confirmed he was among those officials.
The debate has also expanded into the role of artificial intelligence in the broader economy. While some policymakers see AI-driven productivity gains as potentially disinflationary over the long run, others are increasingly concerned that massive investment in chips, data centers, and AI infrastructure could instead add to economic overheating.
Musalem warned against relying too heavily on future productivity gains to solve current inflation problems, particularly with inflation still above target and the labor market remaining resilient.
Cook similarly expressed concerns that AI-related investment spending may itself become a new source of inflationary pressure. Chicago Fed President Austan Goolsbee has gone even further, suggesting that expectations of future wealth generated by AI could encourage consumers to spend more aggressively today, adding further momentum to inflation.
Williams acknowledged that stronger productivity growth could eventually influence interest rates and inflation dynamics, though he appeared cautious about how quickly businesses and consumers would adapt to such changes.
The growing divergence in views highlights the uncertainty now facing the Federal Reserve as officials try to balance stubborn inflation, geopolitical risks, and the transformative but unpredictable impact of artificial intelligence on the U.S. economy.
