Fed Governor Cook Admits AI Boom Is Fueling Inflation, Says Rate Hikes Cannot Fix It

Federal Reserve Governor Lisa Cook delivered a speech titled “An Update on AI and the Economy” on September 28th at the Oakland Tech Week Opening Keynote, cohosted by the Kapor Center in Oakland, California. Cook discusses why she voted with the rest of the Federal Open Market Committee (FOMC) to raise interest rates by 25 basis points at the September meeting, saying the move was necessary because inflation “has been too high for too long”. Yet her speech avoided the Fed’s role in inflation and instead centered on a source of price pressure the Fed has little ability to control: the artificial intelligence investment boom now reshaping the economy. Gold, meanwhile, touched a high of $4,303 the prior trading day, as investors continue to weigh the Fed’s repeated acknowledgments that its tools may not be up to the task at hand.

According to Cook, total inflation rose an estimated 3.8% in the twelve months through August, nearly double the Fed’s 2% target, while core inflation, which strips out food and energy, ran at 3.4% over the same period. She noted that electricity and water costs are each up roughly 5% over the past year, and that core goods prices, which had been falling before the pandemic, are now climbing at more than a 3% annual pace. Cook said this suggests inflation is broadening well beyond AI-specific sectors, into categories with no obvious connection to data centers or chips. She also pointed to the pass-through of higher oil prices and supply chain disruptions tied to the conflict in the Middle East as an additional source of pressure.

Despite the breadth of these increases, Cook argued that monetary policy tools are “too blunt” to target narrow sectors and that attempting to fight sector-specific inflation “could be a mistake.” That admission, coming from a sitting Fed governor, amounts to a concession that the central bank’s management of the money supply has limited precision even by its own standards. Cook added that companies have so far spent only “a small fraction” of a $2 trillion pool of announced AI investment plans, meaning the inflationary impulse from that spending could persist or intensify. She also said a large portion of the rise in equity prices in recent years is attributable to AI enthusiasm, and that the resulting wealth gains are feeding through to household spending, a dynamic that could keep demand-driven inflation elevated for some time.

Cook said she expects AI-driven productivity gains to deliver only “modest disinflation” over the next few years, and stated plainly that she does not expect those effects to arrive in time to offset broadening inflationary pressure later this year. On employment, she cited an August unemployment rate of 4.1%, calling the labor market “roughly in balance,” though she acknowledged recent college graduates are struggling more to find work, possibly because AI is displacing entry-level tasks. She referenced the Federal Reserve’s Small Business Credit Survey, which found nearly half of small employer firms are using AI, with 71% reporting productivity gains, and noted that firms with fewer than 500 employees make up more than 99% of U.S. businesses and have driven 61% of net job creation since 1995.

Cook went further, raising the possibility that AI could cause “at least a temporary increase in the unemployment rate” due to a skills mismatch, and admitted that in such a scenario the Fed “would have limited tools,” since cutting rates to address unemployment could risk fueling more inflation. Taken together, her remarks paint a picture of a central bank navigating inflation that keeps broadening, a labor market with uneven undercurrents, and a technology-driven investment wave it can neither slow nor fully understand. Gold’s continued strength near record levels suggests markets are drawing their own conclusions about how well equipped the Fed actually is to manage what comes next.