Fed Official Warns AI Demand Growth Could Overheat Economy and Delay Rate Cuts

Chicago Federal Reserve President Austan Goolsbee warned that surging investment in artificial intelligence could overheat the broader economy and create risks if market expectations falter. He noted that financial bubble unwinds can become severe depending on the level of underlying leverage. Comparing current spending to the internet expansion, he recalled how companies overbuilt infrastructure based on expected 20% annual growth when actual growth came in at 7%.

The surge in AI data center activity is already driving up costs and creating supply bottlenecks. Businesses report long waiting lists for electrical components, rising construction costs, and shortages of skilled trades like electricians. While AI demand has not yet fully overheated the wider economy, price pressures are beginning to spread beyond directly related sectors into general services.

Investors are monitoring whether these cost pressures will delay monetary easing. Central bank officials maintain that interest rates can fall if inflation trends toward 2% alongside solid employment. However, expanding services inflation driven by tech demand could complicate that trajectory. In response to broad market caution, Invesco QQQ Trust Series I (NASDAQ:QQQ) dropped 0.70%.