AI Investment and Inflation Pressures... U.S. Rates to Rise Again? [Weekend Money]

Rates have surged, but stocks and credit remain resilient
AI infrastructure buildout fuels inflation
Fed likely to keep the door open to another rate hike in December

Analysts say it will be difficult for the U.S. Federal Reserve (Fed) to ease its tightening stance quickly. Long-term interest rates are already high, but stock prices and credit markets remain resilient, while investment in artificial intelligence (AI) and consumer spending are supporting growth.

Fed Chair Kevin Warsh. Yonhap News Agency.

According to Kiwoom Securities, the Fed’s minutes from the September Federal Open Market Committee (FOMC) meeting show that it remains alert to upside risks to inflation, supported by a resilient economy and still-high inflation. Despite a substantial rise in long-term Treasury yields, stock prices, the corporate bond market, and corporate financing conditions remain favorable, leading the Fed to assess that overall financial conditions continue to support economic growth.

The minutes particularly highlighted that increased AI investment is driving economic growth while also potentially raising corporate costs and aggregate demand, thereby adding to inflationary pressures over the medium term. The analysis said rising energy prices and the construction of AI infrastructure are increasing companies’ input costs, while AI-related demand could exceed aggregate supply and put upward pressure on inflation. Accordingly, if increased AI investment and high energy prices constrain the decline in inflation, the Fed is expected to keep the possibility of further rate hikes open.

However, given the recent slowdown in employment indicators and the further rise in long-term interest rates, analysts say a more realistic path would be to review the possibility of a rate hike in December after assessing additional data, rather than rushing to deliver consecutive hikes at the October meeting. The key to future monetary policy is expected to be not the absolute level of long-term interest rates, but whether high rates are actually constraining consumption, investment, and corporate financing.

"Ultimately, these minutes suggest that the Fed may remain vigilant about tightening for the time being, as a resilient economy and increased AI investment are supporting growth while also emerging as new sources of upward pressure on prices," said Kim Yumi, a researcher at Kiwoom Securities. "Rather than expecting a policy shift from the rise in long-term interest rates alone, it is necessary to assess both the effects of future AI investment and energy prices on inflation and how widely the burden of high interest rates is spreading through credit markets and the real economy."

This content was produced with the assistance of AI translation services.