Federal Reserve officials Austan Goolsbee and Tom Barkin warned on Monday that persistent inflation and strong investment in artificial intelligence infrastructure could complicate the central bank’s monetary policy outlook, with both signalling that further interest rate increases may be needed.
Chicago Fed President Goolsbee said the rapid expansion of AI data centres was beginning to resemble demand-driven overheating, while Richmond Fed President Barkin backed further policy tightening but urged caution over its pace.
Their comments come after the Fed left interest rates unchanged last month, following a rate increase in September that marked its first hike since 2023.
Goolsbee flags AI data centre investment as inflation risk
Goolsbee said the Federal Reserve needed to address inflation pressures that were spreading across the economy, including those associated with the rapid expansion of AI infrastructure.
“We’ve got to come to terms with this cost side and inflation side failure in the mandate,” Goolsbee said at an event in Chicago on Monday.
He pointed to rising service prices, which are not closely linked to energy costs or tariffs, as another source of inflationary pressure.
The Chicago Fed president said the AI data centre build-out was increasingly showing signs of traditional demand overheating, suggesting that the scale of investment could add to pressure on the economy.
“And now this stuff with the AI data center build-out is, to my eye, starting to look more just like old-fashioned demand overheating,” he said.
Goolsbee added that central banks typically need to respond aggressively when an economy begins to overheat.
He also said that the labour market and economic growth remained stable, following a report showing strong hiring across a broad range of US sectors last month.
In his assessment, inflation rather than weakness in employment or growth remained the main economic concern.
Goolsbee does not vote on monetary policy decisions this year but is scheduled to become a voting member of the Federal Open Market Committee in 2027.
Barkin supports further rate increases but urges caution
Richmond Fed President Tom Barkin also expressed concern about inflation, describing price pressures as stubbornly elevated.
Speaking in South Carolina, he indicated that further monetary tightening could be appropriate but said policymakers should proceed carefully because of risks to economic demand.
“The appropriate direction of monetary policy is relatively straightforward,” Barkin said. “However, risks to the demand outlook remain easy to envision. Because of that, it is wise to move policy with care.”
Barkin said businesses were increasingly facing pressure to pass higher costs on to customers. These expenses include gasoline and diesel, computer chips and health insurance.
He added that some companies were seeing their profit margins squeezed and were considering whether they could raise prices to offset those costs.
“I’ve talked to a lot of businesses who do feel their margins are squeezed and are looking to the question of whether they can pass it on or not. That’s a very live conversation right now,” he said.
His comments suggest that inflation pressures are extending beyond energy prices and could become more difficult for the central bank to contain.
Fed rate outlook remains focused on inflation
The latest comments from the two regional Fed presidents add to signs that some policymakers favour further interest rate increases.
The central bank kept rates unchanged last month after raising them in September.
Median projections released by policymakers in September showed that most officials expected at least one additional rate increase this year to help bring inflation back towards the Fed’s 2% target.
Inflation has remained above that target for more than five years and has broadened in recent months as higher energy prices linked to the Iran war have affected other parts of the economy.
Barkin also questioned whether opposition to data centre construction would significantly slow AI infrastructure investment.
“It’s a big country,” he said. “If they need to build data centers, I would imagine they’ll find some county that wants to.”
AI disclosure: AI tools assisted with research and drafting of this piece. An ICD editor reviewed the facts, sources and wording before publication. Any opinions or analysis are Invezz’s, not those of an automated system.
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