A Federal Reserve official has highlighted emerging price pressures, particularly in the labor market, driven by investments in artificial intelligence, which could necessitate a return to higher interest rates later this year.
Following a visit to West Texas, Dallas Fed President Lorie Logan noted that AI-related investments are generating new signs of price pressure locally, especially evident in a tightening labor market and rising wages.
During a recent trip to El Paso, the westernmost part of her district, Logan stated in an interview, "A key theme I continue to hear is the demand-side effects from AI construction." She mentioned that companies including Meta, OpenAI, and Oracle Corporation are advancing three data center projects in the area, with even the U.S. Army's Fort Bliss base undertaking related construction, all competing for a limited pool of workers.
In discussions with business and community leaders, Logan learned that both the manufacturing and construction sectors are experiencing labor shortages, forcing companies to raise wages to attract workers. She pointed out that while these changes are not yet fully reflected in national economic data, they represent a potential risk.
Speaking at an event at the University of Texas at El Paso, Logan explained that official statistics are often lagging and subject to revision, leading her to rely more on real-time information gathered from field research. By discussing hiring plans with businesses, she can better gauge whether the economy is approaching a turning point.
For the Federal Reserve, rapid wage growth is typically seen as a warning sign, as it can trigger a wage-price spiral: rising wages push up the prices of goods and services, which in turn leads labor to demand even higher pay, creating a cyclical pressure. She emphasized that such wage changes often appear later in the economic cycle.
Logan also noted that recent inflation concerns in the U.S. have been primarily fueled by the conflict in Iran driving up energy prices, rather than wages themselves. However, the surge in demand for equipment, materials, and labor from data center construction could add further inflationary pressure.
With inflation having exceeded the Fed's 2% target for over five years, policymakers are increasingly worried that this sustained higher level could alter business and consumer behavior. If the market widely expects prices to keep rising, the spending and investment decisions themselves could exacerbate inflation.
Logan stated in El Paso, "I am increasingly concerned that, to fully restore price stability and achieve the appropriate balance in our dual mandate, higher interest rates may be needed later this year."
The report also highlighted that current U.S. economic growth is heavily reliant on AI-related investment, with corporate capital expenditure highly concentrated in this sector, which has also driven the stock market rally over the past three years.
Meanwhile, trade and tariff uncertainties are suppressing investment in other industries. El Paso Mayor Renard Johnson noted that before tariff policies were introduced, local industrial construction was growing rapidly, including warehouse and factory projects related to medical manufacturing, but many projects are now on hold.
He stated, "We have millions of square feet of industrial space waiting to be occupied, with even more under construction." However, the current pace of occupancy is far below expectations, "It's more of a slow trickle now, not the rapid growth we saw before."
Across the river from El Paso, Juarez, Mexico, is a major manufacturing hub responsible for producing electronic components for U.S. data centers. During a visit to a Siemens factory there, Logan gained firsthand insight into the growing demand.
Data shows that Mexico's output of data center-related products has risen significantly over the past year. Exports of automatic data processing equipment reached $85 billion for 2025, compared to less than $40 billion in 2024.
Nevertheless, increased costs from tariffs, compliance costs related to the USMCA agreement, and infrastructure issues continue to dampen companies' willingness to build new factories in the region.
Logan believes these phenomena collectively reflect a global economic environment facing frequent supply chain shocks, with inflationary pressures gradually building. Her observations reinforce the judgment of some Fed officials that future monetary policy may need to tighten further to address potential upside price risks.
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