The artificial intelligence boom, increasingly acknowledged at the Federal Reserve as helping drive inflation, has left central bankers faced with cooling the rest of the economy to lower price pressures amplified by an industry of marquee names like Amazon, Apple and Anthropic considered immune to rate hikes.

Fed officials know their blunt tool of raising borrowing costs lands unevenly. With AI firms spending as if money is no object, economists see the pain of rate hikes falling elsewhere, on firms and families more reliant on credit, or small- and medium-sized businesses that temper their investment plans as borrowing costs escalate.

"There are paths to get there," ADP Chief Economist Nela Richardson said of the Fed's 2% inflation goal, unmet for more than five years. "It's just not every road is open," with the housing market already weak, for example, and the labor market not seen as a source of inflation through rising wages.

"What's left? Small businesses, because they need bank loans, consumers who need to fund payments out of debt and credit cards...Maybe the stock market," seen as supporting consumer spending for wealthier households but often vulnerable to rising rates, she said.

Stocks dropped last week, in fact, after an unexpectedly strong inflation report added to expectations the Fed will have to raise rates higher.

Cleveland Fed President Beth Hammack recently pointed to tempered stock market gains and slowed activity outside the AI boom as ways higher rates could cool the economy "at the margins." "I like growth...I'm not trying to stop growth. I'm just trying to pull it back a little bit so that it's moving at a pace that doesn't put too much pricing pressure out there," Hammack told Reuters last Monday.

The comments by Hammack and others at a National Association for Business Economics conference flesh out what has been a less-discussed aspect of Fed rate hikes: In what ways could higher borrowing costs filter through today's economy and lead to slower inflation?

The Fed meets October 27-28 and is expected to keep rates steady at 3.75%-4.00%. Fed officials say further hikes are likely needed and are now debating the pace and extent.

Fed Chairman Kevin Warsh, speaking last week at an International Monetary Fund meeting in Thailand, acknowledged AI investment was a "shock" to prices and demand even if he sees wealth and productivity gains "over the horizon." "If you're a central banker and you're in the business of trying to ensure stable prices and full employment, you've got to recognize this as a shock," Warsh said.

What he didn't speak to was how the Fed might need to react to the building price pressures, and what that means beyond the borders of an industry expected to invest about $1 trillion next year, roughly 3% of gross domestic product.

At his press conference after last month's policy meeting, Warsh said he did not think the Fed would "need to do harm to the labor markets" to return inflation to 2%. Earlier in the summer he noted housing and agriculture were "showing strains" from higher borrowing costs, even though he did not consider credit conditions "restrictive." What he has not detailed is in what way higher rates might lower inflation or where any economic pain might be felt.

"Warsh has said he does not see a conflict between inflation and unemployment. This is worthy of more explanation. Full stop," former Chicago Fed President Charles Evans said at a NABE central bank panel. "The risks and consequences of raising interest rates higher to bring down inflation are well known." The trade-off between fewer jobs and less inflation has not always been dramatic.

The decline from high COVID-19-era inflation generated only a modest rise in unemployment. Between firms' reluctance to shed workers that had been hard to hire during the pandemic and now President Donald Trump's immigration policies suppressing labor force growth, the unemployment rate has stayed in a low 4.0%-to-4.3% range for more than two years.

That has given Fed officials confidence they can raise rates without causing unemployment to rise much, if at all. But it also means one typical avenue to lowering inflation — the slowed consumer spending that would likely follow rising joblessness — may also be closed.

Policymakers including Richmond Fed President Tom Barkin and St. Louis Fed President Alberto Musalem contend inflation could fall without hitting hard at growth, consumption or jobs. A credible central bank that follows through on rate hikes, they argue, could cause businesses and households to temper wage and price demands, leading to lower inflation.

The challenge, Hammack and others have suggested, is demand may be ramping up, and not just within AI firms.

A broad set of companies is benefiting from the AI boom, particularly those building data centers or making components for them, with order books crammed and investment needed to meet supply.

"The backlogs are real," Christopher Gorman, Cleveland-based KeyCorp's chief executive, told NABE attendees. Commercial clients will tick off the risks they face including immigration and tariffs, "then they'll talk about how good business is" and lay out plans for both investments and price hikes.

Factors affecting inflation could break the Fed's way, including any resolution to the Iran war that lowers oil prices, a halt in Trump's drive to impose tariffs, or a more-measured data-center buildout given swelling local opposition.

Juhi Dhawan, macro strategist at Wellington Management, also noted coming changes in fiscal policy that may help, with cuts coming to public health benefits and expiring tax breaks worth about 0.5% of GDP.

But that doesn't make the path to 2% inflation painless. The stock market beyond AI hyperscalers has not been that robust, she noted, corporate earnings are not expected to be as strong next year, and there's some evidence lower-income consumers are close to pulling back.

Inflation abates, "if housing takes another leg lower, construction probably outside of data centers takes another leg lower, and many non-AI businesses might find the cost of funding prohibitive," Dhawan said, while for consumers "there's a fragility underneath because wages adjusted for inflation are flatlining at best."