The AI investment boom is complicating the Federal Reserve’s effort to control inflation because the companies driving the spending are relatively resistant to higher interest rates, raising the prospect that other businesses and consumers will bear more of the cost.
AI-related investment is expected to reach about $1 trillion next year – roughly 3% of U.S. gross domestic product – as technology companies and their suppliers build data centers and expand computing capacity, Reuters reported.
Federal Reserve Chair Kevin Warsh last week described AI investment as a price and demand “shock,” even as he said it could produce wealth and productivity gains over time. The central bank has not detailed how it can cool inflation driven partly by large technology companies that continue spending despite elevated borrowing costs.
The Fed is expected to hold its benchmark rate at 3.75% to 4% at its Oct. 27-28 meeting, although officials have said additional increases are likely. Inflation has remained above the central bank’s 2% target for more than five years.
Higher rates could instead restrain sectors that depend more heavily on credit. ADP Chief Economist Nela Richardson told Reuters that small businesses and consumers using loans or credit cards could absorb much of the impact. Housing, construction outside data centers and investment by non-AI companies are also vulnerable.
The spending surge extends beyond the largest AI developers. Companies supplying power, construction, chips and other data-center components are reporting full order books and making additional investments to meet demand, adding pressure to prices and capacity.