Cook, An Update on AI and the Economy

Cook's Oakland Tech Week speech is a hawkish policy update wrapped in an AI thesis. She confirms she voted with the FOMC to hike 25bp in September and now casts AI as a live near-term inflation source rather than the disinflationary supply story the market has been trading. She expects the AI buildout, oil pass-through and Middle East supply disruption to keep pressure on prices, and she does not see AI productivity relief arriving in time to offset it. A unanimous hike, no dissent, and a forward-looking bias that still points up for the front end.

What’s new: The September hike and the labor-market resilience are known. The delta is Cook recasting AI as an inflation source, not a disinflation source: broadening evidence in electricity, water and core goods, plus an explicit expectation that AI productivity disinflation is only modest and too late for this year. That cuts against the prevailing "AI is disinflationary" read and argues against early cuts.

KEY FINDINGS

• She voted with the FOMC to raise rates 25bp at the September meeting, framed as addressing inflation 'too high for too long' with total inflation at an estimated 3.8 percent and core at 3.4 percent. Confirms the Fed is still tightening into above-target inflation, keeping front-end yields supported.
• She labels AI investment a driver of inflation and sees it broadening: electricity and water each up around 5 percent over the past year, and core goods running over a 3 percent annual pace so far this year. Flips the market's AI-as-disinflationary trade and argues against early cuts.
• She does not expect AI productivity gains to arrive in time to offset broadening inflationary pressure later this year, and calls the supply-side relief only modest, limited but real. Removes the bull case that an AI productivity boom gives the Fed room to ease.
• She expects continued pressure from the AI buildout plus oil pass-through and Middle East supply chain disruption, and says the labor market is well positioned to handle a rate increase, with unemployment down to 4.1 percent. No growth trade-off is cited to slow tightening, keeping the curve biased to higher front-end rates.
• She flags a scenario where AI raises unemployment via a supply-side skills mismatch, in which the Fed would have limited tools and cutting could risk fueling inflation. Signals reluctance to ease into labor-market weakness, capping the bond rally on soft jobs data.
• On the pipeline, companies have spent only a small fraction of $2 trillion in announced AI plans; nearly half of small employer firms use AI and 71 percent report higher productivity. Points to continued capex-driven demand pressure ahead.

FROM THE DOCUMENT

As you know, I voted along with the rest of the FOMC to raise rates 25 basis points at the recent September meeting.

This increase was to address inflation, which has been too high for too long.

I do not expect those effects to arrive in time to offset the broadening inflationary pressure later this year.

I expect to see continued pressure on inflation from the AI buildout, as discussed today, and from the pass-through of higher oil prices and supply chain disruptions associated with the conflict in the Middle East.