FED'S MUSALEM: EXCESS INFLATION COMING FROM BOTH SUPPLY AND DEMAND AI WILL BRING MUCH HIGHER PRODUCTIVITY DATA CENTER BUILD-OUT CONTRIBUTING TO STRONG DEMAND

St. Louis Fed President Alberto Musalem said excess inflation is originating from both supply and demand, with strong demand partly driven by the data center build-out tied to artificial intelligence. He also argued that AI is likely to deliver substantially higher productivity over time. The transmission mechanism runs through inflation repricing: persistent demand-side pressure keeps the policy rate higher for longer, while expectations of stronger productivity growth could eventually ease inflation without requiring tighter policy, a tension that complicates the path of rate cuts. Rate-sensitive assets such as long-duration Treasuries and growth equities are most exposed, since their valuations hinge on the discount rate, while capital-intensive investment in semiconductors, power, and construction is directly tied to the demand Musalem cited. The next catalyst to watch is the upcoming Personal Consumption Expenditures price index release, which will show whether core inflation is moderating enough to validate the view that supply-side factors are easing.

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