Fed's Musalem says it's risky to bet that AI will ease inflation

May 28 (Reuters) - St. Louis Federal Reserve President Alberto Musalem on Thursday offered a skeptical view of the expectation that artificial intelligence will reduce inflation by fueling a surge in productivity, arguing it would be a mistake for the U.S. central bank to count on that possibility by easing monetary policy.

"With the real policy rate sitting below the (Fed's) notion of long-run neutral, inflation running meaningfully above target, longer-term inflation expectations drifting higher and the labor market remaining stable, I believe it would be risky to rely on the prospect of higher productivity growth in the future to solve our inflation problem today," Musalem said in remarks prepared for delivery to a Central Bank of Iceland and Northwestern University economic conference in Reykjavik.

"A better approach, in my view, is to maintain a vigilant monetary policy focused on restoring price stability."

Musalem is the latest Fed policymaker to push back on the idea that AI will boost productivity growth and possibly allow the central bank to set interest rates lower than would otherwise be the case, a core belief of many members of the Trump administration that is also embraced by Fed Chairman Kevin Warsh.

"If the evidence becomes clear that higher productivity growth is likely to ease inflation pressures, I'm prepared to adjust my policy views," Musalem said. But for now, he added, the jury is out on how much AI will add to productivity, even as the pressures it is already putting on demand for chips and data centers are evident.

Acting now on the basis of faith in the future impact of AI on inflation could be counterproductive, Musalem argued.

"Moving or holding policy rates too low could actually cause longer-term interest rates to rise," if the public questions whether the Fed will ever bring inflation back to the 2% target, he said. "That would discourage investment and have detrimental effects on economic growth and employment."

(Reporting by Ann Saphir; Editing by Paul Simao)