By Nicole Goodkind

Even as new signs of economic strain pile up, Federal Reserve officials are sticking to an upbeat forecast for growth, and they're pointing to artificial intelligence to explain why.

On Monday, New York Fed President John Williams told the Staten Island Economic Development Corporation that he expects the economy to expand at a 2.5% pace this year, above the Fed's own median projection.

That growth, he said, reflects "tailwinds from fiscal policy, favorable financial conditions, and investment in AI."

Kansas City Fed President Jeffrey Schmid echoed that view on Tuesday, saying he sees "solid demand momentum, strong productivity gains, and relatively low unemployment," with AI-driven business investment as a major engine of growth.

Both Fed officials acknowledged that the war in the Middle East has introduced significant uncertainty. But neither said it had changed his fundamental outlook.

That optimism puts Fed officials somewhat at odds with a string of gloomy economic signals. GDP grew at just 0.7% in the final quarter of 2025, half the original estimate, according to the Bureau of Economic Analysis. The effective closure of the Strait of Hormuz, the world's most critical oil shipping lane, has pushed gas prices sharply higher, leaving consumers with less money to spend elsewhere. And consumer spending matters enormously; it accounts for roughly 70% of the entire U.S. economy.

President Donald Trump's Liberation Day tariffs are compounding the pressure. After nearly a year of absorbing higher import costs, businesses are now passing those costs on to consumers, squeezing household budgets further.

Employment has been essentially flat for the past year, meaning workers don't have a large cushion for rising prices. Instead, households are saving less and borrowing more just to keep up their usual spending. None of that is a recipe for strong growth.

And yet the Fed's projections remain bullish. At their March meeting, officials forecast real GDP growth of 2.4% for 2026, up from a 1.8% estimate made in September. Their median projection for 2027 also ticked up to 2.3%.

Fed Chair Jerome Powell attributed the upgraded outlook at the meeting largely to "growing confidence in productivity."

He elaborated at the post-March meeting press conference, "I never thought I'd see this many years of really high productivity and, by the way, expect it to continue. And we haven't really started to see the effects of generative AI. That should certainly contribute to that."

That argument will sound familiar to anyone following the internal debate at the Fed. Gov. Stephen Miran has argued repeatedly that AI-driven efficiency gains allow the economy to produce more without stoking inflation -- a case also made by Kevin Warsh, Trump's pick to succeed Powell as Fed Chair, and Treasury Secretary Scott Bessent.

But Powell drew a distinction. He isn't endorsing the White House's line. In the short run, he warned, the AI boom may actually push inflation higher.

"We're building data centers everywhere. And that's actually putting pressure on all kinds of goods and services that go into building these things. So that's actually probably pushing inflation up at the margin," he said.

Other Fed officials have made similar arguments tying growth to technology. Gov. Michael Barr, speaking at a Brookings Institution dinner last week, said the economy has "continued to grow at a solid pace, supported by resilient consumer spending, substantial productivity growth over the past several years, and exceptionally strong business investment in artificial intelligence and data centers."

Vice Chair for Supervision Michelle Bowman said on Fox Business last Friday that she still expects "strong economic growth this year," pointing to supply-side policies from the current administration.

Schmid added one important caveat to his optimistic picture. A significant chunk of recent growth has been driven by healthcare spending from an aging population, a trend he described as a double-edged sword. Americans over 75 are the fastest-growing age group, he noted, and "in 2025, healthcare spending was the largest single contributor to consumption growth." That is a boost now, but an aging workforce is a long-term drag on the economy's productive capacity.

Fed officials are broadly united in believing AI will support growth and that the Middle East war hasn't yet derailed their outlook. Where they diverge, and where the harder questions lie, is on inflation.

If AI is fueling a building boom that drives up costs in the near term, the Fed may face a trickier balancing act than its rosy GDP projections suggest.

Write to Nicole Goodkind at nicole.goodkind@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 31, 2026 17:51 ET (21:51 GMT)

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