Fed’s Tom Barkin, a former McKinsey CFO, says the ‘AI Apocalypse’ hasn’t arrived

Good morning. The Federal Reserve raised interest rates for the first time since mid-2023 last week as some of the forces pushing up inflation prove harder to shake, Richmond Fed President and CEO Tom Barkin said Thursday.

Barkin pointed to persistent tariff costs, higher gasoline prices and a huge wave of AI investment that is pushing up prices for some technology equipment during a conversation with Barbara Humpton, CEO of USA Rare Earth, at an Economic Club of Washington, D.C., event.

Six months ago, he said, it was easier to argue that inflation’s persistence was temporary, and that oil prices, tariffs and the AI buildout would eventually “morph” away.

“If inflation’s not going to come down relatively quickly,” Barkin said, “then you have to look in the mirror and say inflation looks like it’s been here for a while.”

Barkin has a metaphor for the job Warsh has inherited: a log flume.

“You go slowly up the hill of the last ramp, and then you go full speed down into a pool of water, and the pool of water comes and soaks the guy in front,” he said. “That’s Kevin Warsh or Jay Powell. The rest of us are in back. Our hands are in the air.”

The metaphor captures the bind facing Warsh: The Fed has moved back toward higher rates as inflation has proved more persistent than policymakers expected, while an enormous wave of AI investment is reshaping prices and the labor market.

Barkin said he had “the deepest respect for anyone who would be foolhardy enough to take on the leadership of the Federal Reserve System,” adding that Warsh “made a number of, I think, very profound calls.”

Barkin said the economy is in an enormous AI investment cycle: Companies are spending aggressively because they expect AI to lift productivity, even as that expectation makes them more cautious about hiring.

The technology is already being used for coding, call centers, compliance paperwork and engineering, Barkin said. But strong corporate earnings are working against layoffs. Companies with deep backlogs of technology projects would rather redeploy freed-up capacity than cut headcount, said Barkin, a former McKinsey CFO.

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