With core PCE inflation stuck at 3.1%, Musalem argues the AI productivity miracle hasn't arrived yet and the Fed shouldn't bet monetary policy on it.
The AI revolution might be transforming how we work, invest, and build. But it hasn’t done much to tame prices at the grocery store. Federal Reserve Bank of St. Louis President Alberto Musalem made that point explicitly, cautioning that policymakers cannot lean on hypothetical AI-driven productivity gains as a reason to loosen monetary policy.
Here’s the thing: core PCE inflation, the Fed’s preferred gauge, sat at 3.1% as of early 2026. That’s more than a full percentage point above the central bank’s 2% target. Musalem’s argument is straightforward. You don’t ease policy based on a productivity boom that hasn’t shown up in the data yet.
The AI paradox: tailwind and headwind at the same time #
Musalem’s framing is more nuanced than a simple “AI won’t save us” soundbite. He acknowledged that artificial intelligence serves as an economic tailwind. Companies are pouring capital into data center buildouts, AI infrastructure is creating jobs, and the broader tech ecosystem is humming.
But that spending itself is part of the inflation problem. Massive capital expenditures on AI infrastructure are driving up demand. Electricity prices are climbing as data centers consume enormous amounts of power. And the equity wealth effects from the AI-fueled tech rally are putting more money in consumers’ pockets, which in turn keeps demand elevated.
In his April 1, 2026 remarks, Musalem specifically highlighted this tension. The productivity gains that AI enthusiasts project remain speculative. Actual measured productivity growth still resembles post-World War II averages rather than anything resembling the explosive, paradigm-shifting leap that Silicon Valley keeps promising.
Rates staying put, and what that means #
Musalem’s stance translates into a clear policy preference: hold steady. The federal funds rate currently sits in the 3.5% to 3.75% range, and he’s advocated for keeping it there while monitoring incoming economic data.
By early May 2026, Musalem indicated that the balance of risks had shifted. Inflation persistence now worried him more than employment weakness.
Tariffs are compounding the problem. Musalem observed that tariff-related effects account for roughly half of the inflation overshoot above the 2% target.
Musalem said policymakers cannot depend on AI productivity gains to reduce inflation.
What this means for investors #
For traditional equity investors, Musalem’s stance suggests that the higher-for-longer rate environment isn’t going anywhere soon. Tech stocks, which have benefited enormously from AI enthusiasm, face a peculiar situation. The very narrative driving their valuations higher is being cited by a Fed official as a reason to keep rates elevated. The math is simple. Higher rates increase the discount rate applied to future earnings. Companies valued primarily on projected future cash flows, which describes most AI darlings, become less attractive on a present-value basis when rates stay elevated.
For now, the takeaway for anyone allocating capital is that the AI narrative, however compelling as a long-term thesis, is not functioning as the disinflationary force that optimists predicted. And the Fed, or at least its St. Louis contingent, is not willing to gamble monetary policy on the hope that it eventually will. Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our