Federal Reserve Board Vice Chair for Supervision Michelle W. Bowman emphasized that lowering inflation remains a priority as the labor market strengthens, in a speech at the Council on Foreign Relations in Washington. Persistent price pressures from energy and artificial intelligence (AI) investment complicate the outlook, while tighter financial conditions increase the potential costs of further monetary tightening. She reiterated support for the Federal Open Market Committee’s (FOMC) October decision to hold the federal funds rate target range at 3.75% to 4% while assessing economic trends and financial conditions.
October consumer price data suggest that core personal consumption expenditures (PCE) inflation likely rose to 3.3%, with signs that price pressures are broadening. Unemployment edged down to 4.1% in October, but subdued wage growth does not indicate inflationary pressure from the labor market. Bowman expects core PCE inflation to move closer to 2% in 2027 as tariff, energy and AI pressures ease. Persistent energy costs and supply constraints associated with AI investment could delay that decline. Her approach is to look through temporary energy inflation where possible while monitoring whether it spreads to broader prices or expectations.
AI financing also presents risks to growth and financial stability. Debt associated with AI is on track to exceed USD 800 billion in 2026, while potential payments under lease and contract commitments and residual value guarantees are estimated at more than three times that amount. Disappointing AI revenues could trigger falling equity prices, higher financing costs and reduced credit access, slowing investment, economic activity and inflation. Against already tighter financial conditions, additional monetary tightening must be weighed against pressures on housing and other sectors sensitive to interest rates. The October PCE inflation report and November employment report are due before the FOMC’s December meeting.