The Federal Reserve faces a growing challenge in trying to curb inflation because the massive artificial intelligence investment boom appears largely resistant to higher interest rates, The New York Times reports.
Businesses are continuing to pour money into AI chips, data centers and the electrical infrastructure needed to power them despite elevated borrowing costs, with companies investing more than $100 billion in computers and related equipment in the second quarter, up 60% from a year earlier. Economists estimate AI-related spending could exceed $10 trillion from 2025 through 2032, while regulatory approvals, access to power and the ability to build data centers quickly have emerged as major constraints on the boom rather than financing costs.
That leaves the Fed with a difficult choice if inflation remains above its 2% target. Because the central bank cannot target AI investment specifically, additional rate increases would likely put more pressure on rate-sensitive sectors such as housing, autos and consumer credit, potentially worsening an already cooling labor market.
Meanwhile, the AI boom itself is contributing to inflation by driving up prices for chips, construction materials and skilled labor, with data center construction spending reaching an $85 billion annual rate in August. Higher costs are also spreading to consumers, including through more expensive computing equipment.
The Fed may also need financial markets to cool if it wants to slow broader economic activity, since AI companies have driven much of the recent stock market gains and helped support consumer spending. A significant market decline could weaken CEO confidence and eventually lead companies to reduce hiring.
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