The Trump administration wants lower rates, and so does the new Fed Chair.
Both have been leaning on the same case - that AI will boost productivity so much that inflation cools on its own.
One of the Fed's own just said: not so fast.
St. Louis Fed President Alberto Musalem spoke at a central bank meeting in Reykjavik on Thursday. His message: the Fed can't lean on a future AI boom to fix a present-day inflation problem.
His direct quote: "I believe it would be risky to rely on the prospect of higher productivity growth in the future to solve our inflation problem today."
He'd rather the Fed stay focused on getting prices back to its 2% target.
And he went further. If inflation doesn't start easing in the next one or two quarters, Musalem said the Fed may need to hike rates instead of cutting them.
That puts him at odds with Wall Street, where traders have been pricing in cuts later this year and not a single hike.
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Musalem's bigger point: the AI buildout is fueling demand, not curbing it.
Chip orders, data centers, and power infrastructure spending are all showing up as price pressure right now, while the productivity payoff that would offset those costs hasn't shown up in the data yet.
That clashes with the case Trump officials and new Fed Chair Kevin Warsh have been building for rate cuts.
Their pitch assumes AI will lift productivity enough to let the Fed ease off. Musalem's response: maybe one day, just not today.
He also warned about acting too soon. If markets stop trusting the Fed to hit its 2% target, longer-term rates could rise on their own, which would slow investment and growth.
In English: cutting now on a future AI bet could tighten conditions instead of loosening them.
The Fed has been more split than its press releases suggest.
Earlier this month, Chicago Fed President Austan Goolsbee warned that inflation is spreading past oil and gas into the wider economy. That bearish view has spread to Wall Street too, with Goldman Sachs already pushing its rate cut call to December 2026.
BNP Paribas, HSBC, JPMorgan, and RBC see no cuts at all this year. Musalem's speech adds another senior voice to that camp.
The next big inflation print lands in late June with the May PCE data, the Fed's preferred inflation gauge.
If it keeps climbing, expect more Fed officials to start sounding like Musalem. A rate hike would catch the market flat-footed, since traders are still betting on cuts later this year.
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