Cleveland Fed President Peter Hammack says AI could increase inflation, potentially requiring rate hikes

Cleveland Fed President Beth Hammack said Tuesday that “insatiable” demand for artificial intelligence infrastructure could cause inflation.

If prices continue to rise due to these and other pressures, central bank policymakers said in an interview with CNBC that benchmark interest rates may need to be raised.

“Inflation is too high. It’s been too high for the last five years,” Hammack told CNBC’s Sara Eisen on the sidelines of the European Central Bank meeting in Sintra, Portugal. “Looking at policy, if this situation continues, we may need to raise interest rates to get inflation back on target.”

Hammack focused on spending on AI, specifically citing manufacturers in the district involved in electrical switching for data centers.

“What they’re saying is that the demand is insatiable and these companies, the hyperscalers, will pay almost any price for their inputs, and they need what they built yesterday,” she said. “If you look broadly, especially at large companies, we don’t see much restraint in the economy. We’re not hearing from these companies that interest rates or credit spreads are the reason they’re restraining investment or growth.”

Hammack defended her outlook, saying, “There could be an impact that goes both ways.”

The idea that AI may be accelerating inflation runs counter to a key argument from Federal Reserve Chairman Kevin Warsh, who believes that productivity gains from technology will prove to reduce labor costs and ultimately reduce inflation.

At the same time, Mr. Warsh, in his first press conference as central bank governor, expressed his firm determination to curb inflation, and Mr. Hammack also emphasized this.

“If inflation continues at these high levels and there is no policy restraint, we may need to raise interest rates to introduce policy restraint and bring inflation down again,” he said.

Mr. Hammack is a voting participant this year on the Federal Open Market Committee, which sets interest rates. The committee voted again earlier this month to keep the key overnight rate unchanged, but decided to raise it by a quarter of a percentage point this year, consistent with market expectations.