AI focus
Summary of article:
- Main point one:The Federal Reserve kept interest rates unchanged but indicated a rate hike in December was still possible.
- Point 2:AI investments, energy prices and tariffs are adding to inflationary pressures.
- Key point three:Market sentiment is bearish, stocks are rising but long-term bond yields are still high.
federal Reserve (Fed) kept interest rates unchanged on Wednesday, ChairmanVashu He said that after the increase in interest rates in September, financial conditions have become tighter and policies have started taking effect. However, energy prices remain high, AI investments continue to drive demand and inflation pressures have not abated. Markets are still betting on a rate hike in December, but have reduced expectations for a rate hike next year.
The Federal Open Market Committee (FOMC) voted 10 to 2 to maintain the target range for the federal funds rate at 3.75% to 4%. Governor Cook and Cleveland Fed Chairman Hammack advocated a 1 point increase in interest rates. Cook’s first dissenting vote in more than four years in office attracted particular attention. He recently warned that AI creation has given rise to inflationary pressures that may not ease soon.
The statement changed the pace of economic expansion from “stable” to “strong”, but did not clearly indicate whether interest rates would be raised in December. It only says that more information will be used to determine the appropriate policy stance to ensure that inflation returns to the 2% target in a timely manner.
Washu said that after raising interest rates in September, although energy prices are still high, inflation expectations as measured by the market have declined, giving him confidence that the policy direction is working. He also pointed out that investors have become more cautious while allocating funds. “Although the overall financial situation has tightened, I am not willing or able to say that it has reached the level of austerity.”
This statement is important for market interpretation decisions. Borrowing costs have increased and investors have become more picky, which has begun to restrict the flow of money, giving the Fed time to observe and not raise interest rates immediately. But fiscal conditions are still not strong enough to reassure authorities of the need for further action.
Washer did not specify what circumstances would prompt the Fed to raise interest rates again, but stressed that officials are prepared to act in response to the situation and said there would be a lot of new information available before the next meeting. The third quarter gross domestic product and September personal consumption expenditure (PCE) price index released on Thursday will help clarify the direction of the economy and inflation.
The tricky thing about this policy decision is that inflationary pressures may not come primarily from an overheated labor market. The AI craze has driven investments in data centers, chips and electricity, and rising stock prices have also increased the spending power of wealthy households. Energy prices and tariffs have increased business costs. In contrast, the job market shows no clear signs of overheating.
Raising interest rates won’t increase oil supply, and it won’t necessarily stop tech giants from racing to build data centers. However, Washu disagrees that interest rates cannot influence AI craze. He said: “There has been a popular saying for some time that rising interest rates will not affect AI because investors expect completely different returns. I have always been skeptical of this view. The impact of interest rates is widespread, and almost everything will be affected directly or indirectly.”
Washer said: “It is convenient to attribute the strong economy to this wave of new technologies. But actually looking at the data, including the data since the last meeting, shows that capital spending is not only stronger and stronger, but growth is also spreading to more areas.”
Kaplan, the former president of the Federal Reserve Bank of Dallas and current vice chairman of Goldman Sachs, pointed out that even if the central bank cannot eliminate supply disruptions, it can still reduce the spread of rising costs from diesel to other commodities by curbing demand.
The real disagreement among officials is whether interest rates need to be raised significantly enough to suppress the economy, or whether they need to be raised only modestly to prevent people and businesses from becoming accustomed to high inflation. US inflation has been above 2% for more than five years in a row, and this year may fail to move towards the target for the second year in a row, making it risky to wait.
