Fed Governor Barr counts AI data center spending among the reasons rates should keep rising

Barr's list of what is pushing prices up includes the AI buildout. He cited increased competition for high-tech components and a surge in data center investment ^[4]. He called it a demand-side shock, and it is arriving while crimped oil flows and elevated trade barriers limit aggregate supply ^[5]. Inflation has been above the Fed's 2% target for more than five years ^[3]. He supported the committee's increase earlier this month ^[6]. "In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion," he said ^[7].

Some AI proponents want the Fed to build higher productivity into its outlook now. Lower inflation readings would follow, and so would lower rates ^[8]. Barr laid out the other reading. Faster growth could lift investors' return expectations and cut saving by households that expect higher lifetime earnings, and both point to a higher neutral rate and a higher federal funds rate ^[9]. He said he was open to either interpretation proving true but is focused on current conditions ^[16]. "In my view, it is too early to know if these dynamics are in play right now," Barr said. "What is clear right now is that inflation is too high." ^[10]

He expects AI to give the economy a long-term boost, with "serious short-term disruptions" along the way ^[1]. For the disruptions, his answer is spending on workers. How big the disruption gets, he said, "will depend in part on whether society undertakes the investments needed in new job creation, worker training, connecting workers to new jobs, and other efforts to mitigate adverse effects for the long term" ^[11]. "In my judgement, now is the time for society to begin to consider how to address these potential disruptions, while AI adoption is in its relatively early stages so we can realize the long-term benefits for society," Barr said ^[2]. In his account, speed matters most. Tasks "easily automated with clear guardrails and predictable outcomes" might see "rapid labor substitution" ^[15], and if changes come quickly, "dislocations might be large" ^[12].

Current hiring keeps unemployment flat and adds nothing beyond that. Payrolls have grown by about 80,000 jobs a month this year, a pace Barr called "breakeven" that has kept unemployment around 4.1% ^[13]. Over a full year that comes to roughly 960,000 jobs ^[1]. He also noted higher unemployment among younger workers ^[14]. American Banker's published account breaks off before his conclusion on that point.

The base case is Barr's own. Data center spending keeps going, inflation stays above target and the Fed keeps tightening into the buildout ^[7]. A worse path has rapid substitution arriving before inflation comes down, so hiring slips below breakeven while policy is still tight. The third outcome belongs to the productivity camp: productivity shows up in prices first and their case for easing wins ^[8]. I think the first is the likeliest in the near term, given more than five years above target ^[3]. The case against that view is the third outcome. It would be proved right by inflation falling while data center investment keeps climbing, because that combination would mean the buildout is adding supply faster than it adds demand.