Invest1 publisher2 min readPublished
New York Fed's Williams counts AI demand as a force behind his 3.5% inflation forecast
New York Fed President John Williams lists AI demand for chips and power equipment among the forces behind inflation he forecasts at 3.5% for 2026. He also said the productivity payoff that would argue for easier policy has yet to show up in the data.
The Investor · Invest desk
Drafted by a language model from the sources cited here and checked against its claim ledger before publication. How we use AISend a correction
What happened
- On September 29 Williams described the inflationary effect of the AI demand shock as increasingly salient, next to energy and commodity pressure tied to the Middle East.
- Four days earlier, on September 25, he said the Fed cannot afford to look past supply shocks that persist.
- Williams put AI capital spending in the hundreds of billions of dollars a year and said growth would have been about a third weaker without it in parts of 2026.
- He added that much of that investment is offset by imports, limiting how much it adds to US GDP growth.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- cost Imports cut the US growth credit from AI spending but leave AI on Williams' list of inflation forces, so the domestic economy takes the price pressure against a smaller domestic gain.
- constraint Rates can cool demand but cannot add chip or grid capacity, so an entrenched AI supply squeeze is one Williams has said could make monetary policy less effective.
- decision A bet on quick rate cuts justified by AI productivity runs against a Fed president who has warned those gains may take substantial time to materialize.
Williams' path does nearly all of its disinflation in a single year. Going from 3.5% in 2026 [7] to the just-above-2% he expects for 2027 is a fall of a little under 1.5 percentage points [1]. The 2% target arrives only in 2028 [8]. The path depends on two things: energy prices stabilizing, and AI supply and demand moving into better balance [9].
The second condition is harder to square with how he describes the market. Demand for chips, power equipment and data-center inputs is rising faster than producers can make them, according to Crypto Briefing's account of his remarks [3]. "A race between available supply and surging demand," Williams said [4]. He has also said AI is influencing supply in ways that are not yet fully understood [1]. The 2027 figure needs that race to tighten within roughly a year [8][9].
The forecast could miss in either direction. If chip and power-equipment makers add capacity faster than buyers add orders, AI comes off the inflation list early. Energy might not stabilize. AI data centers are power-hungry, and Crypto Briefing notes that energy costs and AI demand are not fully separate stories [20], so both of Williams' conditions could fail together. Or productivity gains could show up sooner than he expects and offset some of the price pressure.
In my view the evidence supports treating the AI buildout as a reason for the Fed to ease slowly. An investor counting on it to deliver rate cuts through productivity is early. Crypto Briefing draws the same conclusion, writing that a senior official who sees AI demand as a persistent inflation driver may make the central bank more cautious about easing quickly [19]. The reported remarks do not include a rate path, so higher-for-longer is an inference from his inflation forecast. Williams himself acknowledged significant uncertainty about how large these forces are and how long they will last [10].
The view is wrong if AI drops off his list while the buildout keeps going. Tariffs have already made that move. They were the first of the three forces he named on September 29, and he said they are no longer having an impact [2][6].
What to watch
- Whether Williams still names AI demand as an inflation force in his next remarks, or moves it to the no-longer-an-impact column alongside tariffs.
- Whether other Fed policymakers adopt Williams' framing of AI demand for chips and power equipment as an inflation force.