Yellen Sees AI as Inflationary Factor and Rules Out Rate Cuts in the U.S.

Janet Yellen, former chair of the Federal Reserve and former U.S. Treasury Secretary, poured cold water on those hoping that artificial intelligence would solve the problems of the global economy in the short term. For her, massive investments in AI are, for now, more inflationary than productive. And this changes the entire calculation of what the Fed should do with interest rates.

The statement was made during a panel at Expert XP and connects two debates that usually run in parallel, but which Yellen treated as interdependent: the boom in investments in AI infrastructure and the trajectory of American monetary policy.

Yellen's argument is straightforward. The race for data centers, semiconductors, and energy needed to train and run AI models is creating demand shocks in markets that were already under pressure. Advanced chips remain scarce. The demand for electricity for processing centers is growing at rates not seen in decades. All of this puts pressure on prices.

The former Fed chief acknowledged that, historically, new technologies have ultimately generated productivity gains that offset initial costs. But she was keen to separate expectation from evidence. "Productivity may increase again, as happened with the adoption of new technologies in the past, but we do not yet see evidence of that," she stated.

To provide context, Yellen recalled an episode she experienced closely. In 1996, when she was part of the board of governors of the Fed, Alan Greenspan argued alone that the productivity gains brought by the digital revolution would hold inflation down, making a rate hike unnecessary. Most of the board disagreed, but they decided to wait. Greenspan was right. The productivity of American workers grew at an average annual rate of 2.5% between 1996 and 2004, according to data from the Bureau of Labor Statistics, well above the 1.5% of the previous decade.

This time, however, Yellen does not buy the same thesis. "We cannot lower interest rates because of AI. Not now. Maybe in the medium term," she said. This is an important distinction for those following global financial markets: the AI investment cycle is in the cash-burning phase, not in the efficiency-harvesting phase.

Yellen went beyond the narrative that the Fed will remain in wait-and-see mode. In her view, the American central bank is not only analyzing the data but is also prepared to act and raise interest rates if inflation surprises to the upside.

The combination of factors she listed is concerning: supply shocks in different markets, heated demand for semiconductors and energy, and the impacts of conflicts in the Middle East on commodities. Add to this the trade tariffs imposed by the United States, which Yellen classified as having a "huge" but temporary impact on prices.

For investors who had been pricing in rate cuts in the second half of the year, the message is clear. Yellen's baseline scenario does not include monetary easing anytime soon. Those monitoring the impact of tariffs on markets know that the combination of trade protectionism with inflationary pressure creates a particularly difficult environment for risk assets.

Regarding the role of the dollar as a global reserve currency, Yellen adopted a realistic tone. She acknowledged that the sanctions imposed on Russia in 2022, when she was leading the Treasury, accelerated other countries' search for alternatives to the American currency.

"Many countries have begun to wonder what would happen if they were on the wrong side," she admitted. This is a notable statement coming from someone who was directly involved in the decision to use the global financial system as a geopolitical weapon.

Still, Yellen does not see rapid changes. The reason is practical: there are no viable alternatives at scale. The euro has structural limitations. The Chinese yuan operates under capital controls. And although the debate about de-dollarization has gained strength, the global financial infrastructure still revolves around the dollar. According to IMF data, the American currency represented about 58% of global foreign exchange reserves at the end of 2024, a gradual decline, but still a dominant position.

Perhaps the most uncomfortable part of Yellen's remarks was about the fiscal situation in the United States. She classified the issue as one of the major concerns that investors should have, citing structural problems such as an aging population, which automatically increases spending on pensions and healthcare.

The American fiscal deficit reached 6.3% of GDP in fiscal year 2024, according to the Congressional Budget Office, a level that would be alarming in any other country. Public debt already exceeds 120% of GDP.

When asked how to communicate to the public the need for fiscal adjustment, Yellen was extremely pragmatic: "It's very challenging. Those who do this often lose the election." The phrase could have been said about any Western democracy, and the panel moderator did not miss the chance to note the similarity with the Brazilian scenario.

For investors, Yellen's message is not one of panic, but of recalibration. The thesis that AI will solve inflation and allow for lower interest rates may indeed materialize, but not in the timeframe that the market is pricing in. In the meantime, the Fed has the ammunition and willingness to tighten monetary policy. And the American fiscal problem remains the elephant in the room that everyone sees, but no one wants to confront.