STEVE INSKEEP, HOST:
David Wilcox has been listening with us. He's at Bloomberg Economics and the Peterson Institute for International Economics. And he worked for many years at the Fed. Welcome.
DAVID WILCOX: Good to be with you.
INSKEEP: Having listened to the chairman, do you feel you better understand how the Fed sees the economy right now?
WILCOX: You know, maybe a little bit. I thought he had kind of a hybrid message this morning. I thought Scott Horsley characterized it very well. The opening sections were a stout defense of his refusal to telegraph much about his thinking about the economy or where he thinks monetary policy will go in the future. And then in the later portions of the speech, he proceeded to tell us quite a bit more than he's done in the past.
INSKEEP: He also said the predominant focus right now, with a little pause there, should be on prices, meaning he's more worried about that than employment, which is the other thing the Fed is supposed to keep track of. Does that tell you anything?
WILCOX: It was a key statement in the speech. It told us where his predominant concern is, and that is that inflation is running too high. It's been above the Fed's 2% target for five years. And he recognizes that's a situation that he and his policymaker colleagues need to repair.
INSKEEP: Now, let's think about the situation here. Prices remain elevated. They have been for a long time. Inflation remains elevated for a long time, but only - it's not 9%. It's a little over the 2% that the Fed wants. Is it truly hard to get it to move down?
WILCOX: Well, there's not a pleasant solution to it. And the conventional - there's two ways you could get there. One is through good luck. We could get a good break, and prices could just unexpectedly prove weaker than expected, and we get back to 2% inflation in sort of a magical way. The more conventional and, frankly, probably more plausible pathway is a little bit of economic pain. And that's why the Fed always wants to proceed carefully in terms of its decision-making, because you don't get there for free. What does that mean? It means raising interest rates, creating a little more slack in the economy, putting some people out of work, all for the sake of getting inflation back to 2%. It is not pleasant. It's necessary.
INSKEEP: Meaning, I might lose my job, I might pay a higher interest rate for a house or a car or a credit card, those kinds of things. Somebody gets hurt, but the overall economy, hopefully, is more healthy.
WILCOX: That's right. And in the long term, the evidence is really clear, an economy that's functioning with low, stable and predictable inflation works better for the broad population than one where inflation is either too high or too unpredictable.
INSKEEP: Scott mentioned that Warsh is a big proponent of artificial intelligence. And we have all these questions about how the giant AI buildout is affecting the economy and maybe affecting the Fed's thinking about interest rates. He says it doesn't affect their decisions right now. But how is AI likely to affect the Fed and the job it's trying to do as more of it comes online and as investment continues into the trillions?
WILCOX: Well, it's going to be an interesting tug-of-war. Pulling in one direction is all the investment that's going into building out AI capacity, the data centers that are sprouting up all across the country, investment in chips and compute power and all the rest. That's having an inflationary impact by driving people's electricity rates up and making water more scarce. On the other end, eventually, the promise is the hope that AI will make us all more productive. We'll be able to produce more with less labor effort. And that should be disinflationary. So the big uncertainty and a huge topic of debate for people of my circles is, which of these forces will win out and at what time horizon?
INSKEEP: People are very conscious that they may be paying higher electric rates because of the demand for electricity for AI. Is that also happening with credit? There is so much demand for companies to borrow to build data centers that it raises interest rates for anything else that anybody wants to borrow for?
WILCOX: You bet. That investment demand is one ingredient that's going into making interest rates as high as they are today. But it's not the only ingredient. The avalanche of federal borrowing that's happening right now is probably the biggest contributor. We're just simply running deficits at the federal government level that are too big to be sustained. That's probably the major force driving interest rates up.
INSKEEP: David Wilcox with the Peterson Institute for International Economics. Thanks so much.
WILCOX: Thanks, and good to be with you.
INSKEEP: You too. Transcript provided by NPR, Copyright NPR.
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