Fed officials increasingly acknowledge that the artificial intelligence boom is helping drive inflation. Because AI firms are considered immune to rate hikes, economists expect the pain to fall on credit-reliant businesses and households. The Fed meets October 27-28.
Central bankers now have to cool the rest of the economy to lower price pressures that the AI industry has amplified. Reuters reports that firms such as Amazon, Apple and Anthropic are considered immune to rate hikes.
Fed officials know that their tool of raising borrowing costs lands unevenly. Economists see the pain of higher rates falling on firms and families more reliant on credit, and on small- and medium-sized businesses that temper their investment plans as borrowing costs escalate.
Fed leaders say further hikes are likely
The Fed is expected to keep rates steady at 3.75%-4.00% at its October 27-28 meeting. Officials say further rate hikes are likely needed and are debating their pace and extent.
Fed Chairman Kevin Warsh spoke at an International Monetary Fund meeting in Thailand. According to Reuters, he said of AI investment: "you've got to recognize this as a shock" He still sees wealth and productivity gains over the horizon. However, he did not say how the Fed might need to react to the building price pressures.
Cleveland Fed President Beth Hammack pointed to tempered stock market gains and slowed activity outside the AI boom as ways higher rates could cool the economy at the margins.
Where the pain could land
ADP Chief Economist Nela Richardson said not every road is open to reach the Fed's 2% inflation goal, which has gone unmet for more than five years. She noted that the housing market is already weak and that the labor market is not seen as a source of inflation through rising wages.
Her list of what is left includes small businesses that need bank loans, consumers who fund payments with debt and credit cards, and possibly the stock market. Stocks dropped last week after an unexpectedly strong inflation report added to expectations that the Fed will have to raise rates higher.
Demand may also be building beyond AI firms. A broad set of companies, particularly those building data centers or making components for them, is benefiting from the boom, with order books crammed.
Not every policymaker sees a painful path. Richmond Fed President Tom Barkin and St. Louis Fed President Alberto Musalem contend that inflation could fall without hitting hard at growth, consumption or jobs if a credible central bank follows through on hikes.
Source: Investing.com (Reuters)
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