By Ann Saphir
May 28 (Reuters) – A growing number of U.S. central bankers say there may be a case for raising interest rates if inflation does not ease soon, even as they express skepticism over the power of AI to help that process along.
The combination sets the table for a heated debate at Federal Reserve Chairman Kevin Warsh’s first policy-setting meeting next month.
“If we don’t see disinflation in the next one to two quarters, that would concern me,” St Louis Fed President Alberto Musalem said at a Central Bank of Iceland and Northwestern University economic conference in Reykjavik as he laid out scenarios that in his view may require a Fed rate hike. “Right now my view is that the risks have tilted more towards the inflation side than the labor market side.”
His remarks followed a report showing U.S. inflation increased at its fastest pace in three years in April, with the personal consumption expenditures price index rising 3.8% from a year earlier on higher energy prices amid the war with Iran.
Fed Governor Lisa Cook late Wednesday made a similar observation.
While holding the policy rate steady is the right move for now, she said, “I am prepared to raise rates, if the expected disinflation does not appear in a timely manner.”
The influential president of the New York Fed John Williams meanwhile on Thursday reiterated his view that policy is in the right place, though persistently high inflation would call for higher interest rates, he said.
The rising chorus of hawkish voices at the Fed puts Warsh in a potential pickle, in no small measure because President Donald Trump picked him to be Fed chair with the explicit expectation that he would cut rates.
In recent months, Warsh has suggested that he could support a rate cut if it were paired with trimming the Fed’s balance sheet, and has said he believes that artificial intelligence will help drive down inflation, a view that also lends itself to support for lower interest rates.
But sharply higher gasoline and fuel prices since the start of the Iran war have set off a debate among Fed policymakers over whether elevated energy prices coming on top of tariff-related price pressures will seep more broadly into inflation. That could require the interest-rate hike that financial markets are now broadly betting on. The Fed has kept its policy rate in the 3.50%-3.75% range all year.
Last month at least six of the Fed’s 19 central bankers felt the Fed should remove language from its post-meeting statement that suggests a rate cut is the central bank’s most likely next move, and should instead signal that a rate hike is just as likely. Musalem on Thursday said he was among that cohort.
