Cleveland Fed's Hammack: AI Infrastructure Demand Driving Inflation

Cleveland Federal Reserve President Beth Hammack warned that surging investment in artificial intelligence infrastructure is contributing to persistent inflation, potentially requiring the central bank to raise interest rates rather than cut them.

Speaking to CNBC from the European Central Bank Conference in Sintra, Portugal, Hammack pointed to what she called "insatiable" demand from companies building AI capabilities as a key inflationary pressure. She cited conversations with manufacturers in her district, including an electric switching supplier for data centers, who report that major technology companies will pay nearly any price for critical components.

"What they say is that the demand is insatiable, that these companies — these hyper scalers — will pay almost any price for those inputs, and they need things built yesterday," Hammack said.

Inflation remains above target

Hammack emphasized that inflation has remained elevated for five consecutive years and shows little sign of moderating to the Fed's target. She noted that large companies in particular appear unconstrained by current interest rate levels, continuing to invest aggressively despite the Fed's efforts to cool the economy.

"When I look broadly, particularly around large companies, I'm not seeing a lot of restraint in the economy," she said. "I'm not hearing from these businesses that interest rates or credit spreads are a reason why they're holding back from investment and growth."

If inflation persists at current levels without evidence that monetary policy is restraining economic activity, Hammack indicated the Federal Open Market Committee may need to raise its benchmark rate. She serves as a voting member on the committee this year.

Contrasting views on AI's impact

Hammack's assessment stands in notable contrast to Fed Chairman Kevin Warsh's perspective on artificial intelligence. Warsh has argued that productivity gains from AI will reduce labor costs and ultimately prove disinflationary. However, Hammack's focus centers on the immediate demand-side pressures from building out AI infrastructure rather than longer-term productivity benefits.

The Federal Open Market Committee voted earlier in June to hold its key overnight interest rate steady while projecting a quarter-point increase later this year, aligning with market expectations.

Why it matters

The debate over AI's inflationary impact has significant implications for monetary policy and business planning. If infrastructure buildout costs continue driving prices higher before productivity gains materialize, companies may face a prolonged period of elevated borrowing costs. This could particularly affect sectors dependent on credit for expansion while simultaneously benefiting AI infrastructure providers experiencing unprecedented demand. The divergence in Fed officials' views also signals uncertainty about how quickly AI's economic benefits will offset its near-term cost pressures.

These details were first reported by CNBC's Jeff Cox.