Federal Reserve official Alberto Musalem warned that strong demand for capital, rising government deficits and heavy investment in artificial intelligence could keep interest rates higher than historical levels.
Musalem said demand for capital is currently running at around 3% to 4% of GDP and is expected to remain strong over the next five to 10 years. He noted that AI investment and government borrowing are adding upward pressure on Treasury yields, while some investors are increasingly concerned about the long-term sustainability of US government debt.
Musalem also stressed the importance of maintaining the Federal Reserve’s independence, saying government debt management should remain separate from monetary policy decisions. He added that market-based inflation expectations remain anchored and that he does not see the Fed’s credibility being questioned.
Meanwhile, Musalem said financial conditions have tightened modestly but in an orderly manner, while overall credit conditions remain solid despite some market concerns. However, he warned that consumer strength could weaken, potentially creating risks for economic growth.
