St. Louis Federal Reserve President Alberto Musalem cautioned that the central bank cannot rely on hypothetical AI-driven productivity gains to loosen monetary policy, as inflation remains stubbornly above target.
The core PCE inflation, the Fed's preferred gauge, stands at 3.1%-more than a full percentage point above the 2% target. Musalem argued policymakers should not ease policy based on a productivity boom that has yet to materialize in the data.
Musalem acknowledged that AI serves as an economic tailwind, with companies pouring capital into data center buildouts and creating jobs. However, he noted that massive capital expenditures on AI infrastructure are driving up demand, pushing electricity prices higher, and fueling inflation through equity wealth effects from the tech rally.
The federal funds rate currently sits in the 3.5% to 3.75% range, and Musalem advocated for keeping it there. By early May 2026, he indicated that inflation persistence now worries him more than employment weakness.
Tariffs are compounding the problem, accounting for roughly half of the inflation overshoot above the 2% target. Musalem's stance suggests a higher-for-longer rate environment, which could pressure tech stocks valued on future cash flows.