• San Francisco Fed President Mary Daly argues AI investment is not an immediate inflation risk, with productivity benefits unfolding over years.
  • Near-term monetary policy remains focused on traditional drivers like tariffs, energy, and food costs, not AI.
  • AI-related capex could lift long-run productivity and be disinflationary, but the effect is not material for current policy decisions.

AI's Long-Term Productivity Promise

Mary Daly, President of the San Francisco Federal Reserve, stated on Thursday that the surge in artificial intelligence investment is unlikely to stoke inflation in the near term. Speaking at a conference in San Francisco, Daly emphasized that the productivity gains from AI would materialize over a 5-10 year horizon, making it a secondary concern for policymakers currently focused on more immediate price pressures from tariffs and rising energy costs.

"The investment shock from AI is real, but we see it as a long-run story for productivity, not a near-term inflation driver," Daly said. She noted that while AI-related capital expenditure—spanning data centers, chips, and software—could boost demand and potentially lift the neutral rate of interest, the current inflation trajectory is tied to traditional factors. "Tariffs, food, and energy prices are what we're watching now," she added.

Market Implications

Daly's comments come as markets scrutinize the inflationary impact of tech giants' massive AI spending plans. Some analysts have worried that AI-driven demand for semiconductors and construction could create price pressures in specific sectors. However, Daly pushed back against that narrative, arguing that any such effects are modest and transitory. "If anything, AI could be disinflationary over time if it lifts productivity growth," she said.

Her remarks align with a broader Fed stance that has downplayed AI's immediate role in inflation since 2024. The central bank has kept its policy rate steady at 4.25%-4.5% as it waits for more clarity on tariff impacts and the labor market. Daly reiterated that policymakers need to see conclusive data before adjusting rates based on AI's potential.

Balancing Short-Term Risks vs. Long-Term Gains

While Daly downplayed AI's near-term inflation risk, she acknowledged that the investment boom itself could create some price pressures in hardware and construction. "We're not ignoring it, but it's not the main event for now," she said.

Reached for comment, a Fed spokesperson declined to elaborate beyond Daly's public remarks. Economists are divided: some argue AI could raise the neutral rate, while others see it as a deflationary force. For now, Daly's message is clear: the Fed will stick to its knitting, watching traditional inflation drivers while keeping one eye on the long horizon.

Correction: An earlier version of this article mischaracterized Daly's timeline for AI productivity gains. It should be 5-10 years, not 2-3 years.