Dudley Warns AI Spending Could Lift Rates Before Steeper Fed Cuts

Former New York Fed President Bill Dudley warned that artificial intelligence investment could create a sharp turn in the interest-rate path, with more upward pressure in the near term and stronger cuts later if the spending cycle loses momentum.

Dudley said markets may not fully reflect either side of that shift. Investment in data centers and computing capacity is competing for funding, which could lift economic growth and asset prices and add pressure for rates to rise further.

If investment peaks or financing weakens, the same spending cycle could quickly weigh on the economy and prompt the Federal Reserve to cut rates sharply. Dudley said those cuts could be more forceful than current forward-market pricing suggests.

A related warning that AI infrastructure demand could keep U.S. rates higher focused on the risk that broader inflation pressure could make it harder for inflation to ease.