Former NY Fed President Dudley: AI investment boom may lead Fed to hike first, then cut sharply

October 21 — Former New York Fed President Bill Dudley said AI infrastructure investment could push interest rates higher than the market expects in the short term, but as data center capital spending growth slows or the financing chain weakens, AI investment could quickly shift from a driver of economic growth to a drag, forcing the Fed to cut rates sharply.

Dudley believes AI investment's continued competition for limited funds could push up real interest rates; once capital spending peaks, tech stocks pull back, and corporate financing pressures intensify, both the economic downturn and the magnitude of rate cuts could exceed market expectations. He also noted that the Fed is unlikely to hike rates at next week's meeting, but he personally believes that with AI investment continuing to fuel demand and inflation possibly exceeding the 2% target for a sixth consecutive year, the Fed should tighten policy more quickly.