Fed's Kashkari says he's skeptical AI is replacing workers, but it may push up rates

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Kashkari sees AI investment driving borrowing costs higher

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Kashkari supports gradual Fed rate cuts, says drastic cuts would spark inflation

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'Grand declarations' about AI replacing workers may not pan out, Kashkari suggests

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By Ann Saphir

Oct 7 (Reuters) - Federal Reserve Bank of Minneapolis President Neel Kashkari on Tuesday said that while he doesn't believe artificial intelligence will quickly replace U.S. workers, massive investment in AI data centers will tend to drive borrowing costs higher, even if the Fed reduces its short-term policy rate.

President Donald Trump has pushed for the Fed to lower interest rates in part to help make housing more affordable, and recently appointed a new Fed governor who says Trump's immigration crackdown is already driving rent inflation down and is calling for massive rate cuts.

"Even if the Fed embarks on one or more interest rate cuts, it may not translate into lower mortgage rates because the capital that would have been building homes or apartment buildings is being diverted to build data centers which are generating a stronger investment return," Kashkari said at the Star Tribune's North Star Summit 2025, where he shared the stage with OpenAI's chief economist Ronnie Chatterji.

"If we were to cut interest rates dramatically beyond what is justified based on the economics, you would then see probably a very low unemployment rate and very high inflation as the economy was effectively overheating."

Kashkari supported the Fed's September quarter-percentage-point interest rate cut and says he believes the central bank should make same-sized reductions at its next two rate-setting meetings, later this month and in December, to protect the U.S. labor market from weakening.

He did not elaborate on those views at Tuesday's event, which was largely focused on the impact of AI on the economy, but he made clear he does not believe that AI is the main force behind the job market slowdown. Tariffs, he said, are both pushing up on prices and slowing the economy.

While OpenAI's Chatterji argued that AI will enhance productivity, Kashkari was more skeptical, saying he expects AI tools to be able to perform narrow tasks well but not to be an all-purpose technology. And while some companies, including Walmart, say AI will allow them to freeze headcount for years, Kashkari noted that technological innovations in the past have taken a long time to make their way into the economy.

"We're hearing a lot of grand declarations, but we're not seeing the evidence yet," Kashkari said. "I'm skeptical that you're seeing a lot of workers being replaced with AI right now. It feels to me like it's way too soon." (Reporting by Ann Saphir; Editing by Andrea Ricci)