Fed's Cook flags AI buildout and persistent supply shocks as inflation risks

Cook's comments took a hawkish stance, and if they gain traction across the committee, they could work against loosening policy and maintain the possibility of additional rate increases, potentially benefiting short-dated Treasury yields and the dollar. Her assertion that the Fed might no longer disregard supply shocks has implications for crude oil: if energy-led price increases become more policy-significant, then rises in oil prices could more directly fuel expectations of further tightening, instead of being dismissed as fleeting. For equity markets, Cook's assessment that the AI expansion is driving near-term inflation adds a fresh element to the AI trade, connecting the capital spending surge to a greater likelihood of rate hikes. Traders will look for whether other policymakers echo this theme before making significant price adjustments.

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Earlier coverage:

• Fed's Jefferson: Accumulating more data will enable the Fed to improve its rate decision
• Fed's Schmid: Climbing long-term rates are putting pressure on housing and commercial lending

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Key takeaways:

• Fed Governor Cook noted that supply shocks have proven unexpectedly persistent and are gaining significance for monetary policy.
• She indicated that the optimal policy response to a supply shock could vary by sector, departing from the standard approach of looking through them.
• Cook described AI as the biggest risk for 2027, asserting that its expansion is already generating inflationary pockets and supply bottlenecks that might be slow to dissipate.
• She expressed concern about when AI productivity gains will arrive and warned about a potential major reorganisation of work.
• Cook emphasised that inflation expectations must stay anchored and that consumer confidence deserves close attention.
• She stated that private credit does not have a substantial effect on financial stability.

On Thursday, Fed Governor Lisa Cook stated that recent supply shocks have proven unexpectedly durable and are gaining relevance for monetary policy, and she identified AI as the biggest risk for 2027.

During a discussion with New York Fed President John Williams at the regional Fed bank, Cook noted that central bankers have traditionally chosen to ignore supply shocks. The logic, she outlined, is that stricter monetary policy cannot affect oil prices or conflict, but it can harm employment and production, which the Fed cares about more.

Cook argued that this perspective may need reassessment. The best policy response after a supply shock, in her view, could now differ depending on the sectors affected.

She also stressed the need to keep inflation expectations anchored and said the Fed should monitor consumer confidence closely.

AI dominated much of her discussion. Cook views AI as the foremost risk for 2027, arguing that the technology is already causing inflation rather than reducing it. In her assessment, the AI expansion is leading to pockets of inflation and supply bottlenecks that could be slow to resolve. She voiced concern about the arrival of AI's productivity benefits and cautioned that the technology might bring a major reorganisation of work.

These remarks conflict with the widespread belief that AI will mainly be disinflationary through productivity gains. Cook's perspective suggests she sees the near-term investment phase, with its demand for capacity and inputs, as a standalone inflation risk, with any productivity dividend arriving later on an uncertain schedule.

On financial stability, Cook stated that private credit does not have a major impact.

Cook emphasised that her words reflect her personal views and do not represent a decision by the Federal Open Market Committee. Nonetheless, they contribute to the picture of policymakers assessing persistent price pressures from multiple directions. Markets will watch whether other officials echo her concerns about supply shocks and AI-driven inflation, and whether that starts to influence the debate on the interest-rate path through 2027.