AI Cannot Solve Inflation. Fed Officials Speak Hawkishly, April Economic Data Confirm No Rate Cuts This Year

Tradingkey - On May 28, the final set of U.S. economic data for April was released, further confirming that inflation is spreading across a broader range of industries. At the same time, it consolidated market views that the Federal Reserve will not cut interest rates this year. Recent hawkish remarks from Fed officials also indicated that the AI boom cannot be relied upon to solve inflation issues.

The inflation report released today by the U.S. Bureau of Economic Analysis showed that the U.S. Core PCE Price Index increased by 3.3% year-over-year in April, the highest level since November 2023. On a monthly basis, it grew by 0.2%, lower than the previous value and the expected 0.3%. The headline PCE Price Index for April rose 0.4% month-over-month, also lower than the expected 0.5%, while growing 3.8% year-over-year, in line with market consensus.

On the other hand, the final reading of real Gross Domestic Product (GDP) for the first quarter of 2026 was revised down to an annualized rate of 1.6% from the initial 2.0%, missing market expectations. Personal consumption expenditure data for April, released at the same time, showed that personal spending growth slowed to 0.5% for the month as expected, consistent with the general market consensus.

Notably, orders for core capital goods—viewed as a barometer for corporate capital expenditure—unexpectedly contracted, complicating market assessments of the trajectory of actual manufacturing demand.

Specifically, durable goods orders in April increased by 7.9% month-over-month, significantly exceeding the previous 0.8% and the expected 3.5%, marking the largest increase since May 2025. Durable goods orders excluding transportation equipment grew by 1.1%, higher than the expected 0.5%; however, non-defense capital goods orders excluding aircraft fell by 1.1%, compared to an expected growth of 0.4%.

Following the release of all economic data for April, market attention shifted toward the Federal Reserve's interest rate path. Speeches from Fed officials have also provided forward-looking insights into the Federal Open Market Committee's (FOMC) potential policy direction.

Following the release of the inflation data, St. Louis Fed President Alberto Musalem publicly voiced skepticism today regarding market expectations that "artificial intelligence will significantly reduce inflation by boosting productivity." He stated that it would be a serious policy error for the Fed to ease monetary policy based on this unproven possibility.

Musalem noted that the current real policy rate is below what the Fed considers the long-term neutral level, inflation remains significantly above the 2% target, long-term inflation expectations continue to rise, and the labor market remains stable. Against this backdrop, relying on the prospect of future productivity gains to address current inflation poses extremely high policy risks.

It is reported that the new Fed Chair Kevin Warsh has publicly supported the view that "AI will significantly boost productivity," thereby allowing the Fed to maintain interest rates at a lower level than would otherwise be normal.

Musalem maintained policy flexibility, stating: "If there is clear evidence in the future that productivity gains can indeed alleviate inflationary pressures, I would be willing to adjust my policy stance." However, he added that while AI has clearly driven demand for chips and data centers, the extent to which AI can enhance overall economic productivity remains inconclusive.

Musalem further pointed out that easing policy prematurely based on a belief in AI's future impact on inflation could be counterproductive.

He stated: "If the public begins to question the Fed's ability to return inflation to its 2% target, maintaining policy rates at too low a level or cutting rates prematurely would actually push up long-term interest rates. This would dampen corporate investment and ultimately have an adverse impact on economic growth and employment."