Fed governor Lisa Cook says the AI buildout is adding to near-term inflation, while oil at $105 a barrel has pushed the 10-year Treasury yield to 5.241%, its highest since 2007. Futures already price a 70% chance of an October hike. The desk expects the Fed to raise rates, increasing the cost of capital for the AI buildout.
Federal Reserve governor Lisa Cook told an AI conference in Oakland on Monday that the technology industry's own boom is now feeding inflation. The hope that AI would pay for itself in lower prices was the most comfortable reason for the Fed to look past a capex cycle that has strained power grids and leaned on debt. Her remarks put that argument in doubt, and the desk now sees a hike at next month's meeting as the likely outcome. Reuters has the speech. The Fed's policy rate already sits at 3.75% to 4.00% after this month's increase, and inflation has now run above the 2% target for more than five years.
Cook said she expects continued inflationary pressure "from the AI buildout ... and from the pass-through of higher oil prices and supply chain disruptions associated with the conflict in the Middle East." She was specific about timing. AI productivity gains will eventually deliver some disinflation, she said, but not fast enough to matter this year, and the price effects she is watching are broadening beyond the AI sector itself. Headline inflation ran at 3.8% over the twelve months through August, already well above target and, in her own words, "too high for too long."
She is not alone. Richmond Fed President Tom Barkin made a similar point in a September 22 speech, pointing to tariffs, gasoline and a wave of AI investment that is pushing up prices for some technology equipment. Two policymakers are now on record treating AI spending as a source of near-term price pressure. The industry presents AI capex as deflationary: more compute should mean lower unit costs and cheaper goods downstream. Fed policymakers are not accepting that argument on the horizon relevant to their next vote.
Futures are pricing the shift quickly. Contracts tied to the Fed's October meeting showed a 70.3% chance of a hike on Monday, up from 57.6% a week earlier and just 17.7% a month ago. The Fed has already raised rates once this cycle, a unanimous quarter-point move earlier in September and its first increase in three years, and officials' own projections pencil in one more by year end. Cook's speech reads like the case for delivering it on schedule.
Middle East tensions dominated Monday's market moves. Brent settled at $105.28 a barrel after President Trump rejected Iran's proposal to reopen the Strait of Hormuz, the 10-year Treasury yield climbed to 5.241%, the highest since 2007, and the S&P 500 fell 0.77%, its worst day since August 20, Reuters reported. The bond market is also sending a warning of its own: the gap between two-year and 10-year yields narrowed to as little as 17 basis points last week, and Bloomberg reports traders now see an inverted curve, the classic recession signal, as a live risk if the Fed keeps hiking.
The 10-year yield also affects whether the AI buildout pays for itself. Data centers, power contracts and leased compute are financed today against cash flows expected years out, and a 5.24% discount rate makes those future dollars worth noticeably less than they were at 4.2%. The AI trade is financing itself at the highest long-term borrowing cost in nineteen years, at the same moment Fed governors are naming that trade as a reason to keep raising short-term rates. Higher rates and heavier capex needs are landing on the sector at the same time.
The effect varies by company. Nvidia added $150 billion to its buyback authorization on Monday, taking the total to $235 billion to be completed by early 2028, and its stock rose 1.6% even as the broader market fell. A company generating enough free cash flow to fund a buyback that size does not need to borrow to keep building, so a higher discount rate barely touches it. The exposure sits with the companies financing data centers, power purchase agreements and leased GPU capacity with debt, where a rising 10-year yield raises the cost of every future dollar of capacity before it produces a cent of revenue.
AI bulls say the technology will become disinflationary as it matures. Cook also expects productivity gains to reduce inflation over the medium term, too late to offset this year's price pressure, which is already spreading beyond AI-adjacent categories into the wider basket the Fed tracks each month. A forecast of eventual relief does not argue against a near-term hike. If anything, it is what lets the Fed raise rates now without contradicting its own long-run story about the technology, since a governor who expects AI to help inflation later has more room to act on inflation today.
Cook also raised a concern about employment. She is watching for AI to push unemployment up, at least for a while, and said the Fed would have limited room to respond, because a rate cut aimed at jobs would feed the inflation AI spending is already adding. The same technology could raise prices and joblessness at once, leaving the central bank with fewer options. Hiking now, while the labor market looks able to take it, is the cheaper option.
The Fed meets October 27 and 28, and futures already treat a quarter-point hike as the likely outcome. We think the Fed delivers it, with Cook's remarks and $105 oil doing more of the justifying than anything happening in the labor market, which Cook herself described as well positioned to absorb higher rates. Friday's payrolls report, due October 2, is the one release that could still change the calculus. Barring a sharp downside surprise there, the next move in the federal funds rate is up, on October 28.