Federal Reserve Governor Lisa Cook said Monday that the artificial-intelligence build-out, higher oil prices and supply-chain disruptions linked to the conflict in the Middle East could continue adding to inflation pressure in the coming months.

Speaking in Oakland, California, Cook said the timing, number and size of any further interest-rate increases would depend on incoming economic data and on how the economy responds to policy actions already taken. She said the labor market appears well positioned to handle higher interest rates.

Cook, a permanent voting member of the Federal Open Market Committee, said she would consider what policy rate may be needed to continue guiding inflation toward the Federal Reserve's 2% target. Her comments suggested that inflation risks may be broadening, while she viewed the labor market as strong enough to absorb tighter financial conditions.

AI-related price pressure

Cook distinguished between price increases limited to specific sectors and inflationary pressure affecting the broader economy. She said prices for AI-related goods, including chips, computers and software, have surged because of strong demand in those areas. Using monetary policy to counter such sector-specific price increases could be a mistake, she said, because the Federal Reserve's tools are too broad to target narrow sectors and addressing relative price changes is not the central bank's role.

At the same time, Cook said AI investment could create economy-wide inflationary pressure. Data-center construction requires labor and energy, and the resulting infrastructure is used across multiple sectors. She said additional investment remains in the pipeline.

Cook pointed to electricity and water costs rising by around 5% over the past year, while core goods prices have increased by more than 3% this year. She also said a large share of the rise in stock prices in recent years reflects enthusiasm about AI, with the resulting increase in household wealth appearing to support consumer spending. That could allow broader and newer price pressures to replace inflation in the narrower AI-related sectors as those pressures moderate, she said.

Her remarks point to utility costs and the pace of data-center investment as indicators to watch in upcoming inflation readings, since she framed both as channels through which sector-specific demand could turn into economy-wide pressure.

Higher oil prices and supply-chain disruption associated with the Middle East conflict are also continuing to pass through the economy. Cook's expectation that this pass-through is still under way leaves energy prices and developments related to the conflict as factors in the outlook for interest-rate policy.

Productivity and the labor market

Cook said a well-timed productivity boom could offset broader inflationary pressure if it increases supply capacity by more than demand. She expects productivity gains to produce a modest decline in inflation within the next few years, but not soon enough to offset what she described as broadening inflationary pressure later this year.

She said is limited evidence so far that AI is changing the structure of the labor market, although she expects the technology to transform business practices and employment in the future. Cook said she hopes adoption will proceed in a way that allows job creation to match or exceed job destruction.

She is also watching for any temporary increase in unemployment. In that situation, Cook said, the Federal Reserve would have limited tools because cutting interest rates to cushion the labor market could add to inflation.

Cook's comments came as policymakers continue to assess the effects of earlier rate decisions. She said future adjustments would be guided by the economy's response to policy, as well as inflation and labor-market data over the coming months.

Bank-regulation thresholds

Federal Reserve Vice Chair for Supervision Michelle Bowman did not address the economic or monetary-policy outlook in the coverage reviewed. Attention instead focused on a report that the Federal Reserve is considering raising the asset thresholds that trigger stricter bank requirements.

The thresholds determine when banks become subject to stress testing and more demanding capital, liquidity and reporting rules. The potential changes would account for inflation and economic growth. Bowman has previously argued that fixed thresholds become more restrictive over time, and she suggested in January that they could be indexed to nominal gross domestic product.

Requirements currently become more stringent at asset levels of $100 billion, $250 billion and $700 billion. Moving the upper threshold toward $1 trillion could give larger regional lenders more room to grow, although the proposal is still taking shape, and any formal change would go through the Fed's usual rulemaking process, beginning with a proposed rule and public comment period.

The original report is available from investingLive.