Cook highlights AI's economic promise, warns of inflation risks

Federal Reserve Governor Lisa D. Cook outlined a cautious economic outlook, noting that the personal consumption expenditures (PCE) price index rose 3.8 percent over the 12 months ending in April, with core PCE at 3.3 percent—both exceeding the 2 percent target.

She attributed this to gasoline price increases from the Iran conflict, tariffs, and significant AI-related investment demand, including over $1.5 trillion in data center plans.

This demand is driving up prices for chips, high-tech equipment, and specialty construction wages, alongside 5 percent rises in electricity and water.

While the labor market remains stable at 4.3 percent unemployment, Cook highlighted elevated downside risks from geopolitical conflicts and potential AI-related job displacement.

She expressed optimism for robust GDP growth and productivity, expecting AI to provide a further boost.

Cook believes holding rates steady is the appropriate course, though risks remain tilted toward higher inflation, and she is prepared to adjust policy if conditions change.

Governor Cook expressed optimism about AI's potential to boost productivity and innovation within the financial sector.

She noted its increasing adoption in areas like compliance, back-office operations, and for generating novel analytics, also aiding in updating legacy code and scanning for cyber vulnerabilities.

Cook highlighted opportunities for improved credit access, efficient capital allocation, and customized financial products.

However, she also addressed significant risks, particularly from AI-driven algorithmic trading.

This could lead to increased correlated trading, model collusion, market manipulation, and greater market concentration.

The potential for AI to displace or disrupt entire sectors also presents a vulnerability to financial stability.