The Fed is preparing to raise rates. What if it doesn’t work?

Key Points:

• The Federal Reserve is preparing to raise interest rates for the first time since July 2023, driven by rising inflation partly fueled by the Middle East conflict and concerns over a massive AI infrastructure spending boom.
• Fed officials worry that the surge in data center construction and related investments in semiconductors, power, and skilled labor is pushing aggregate demand higher, potentially sustaining inflation for a longer period.
• Key Fed members, including New York Fed President John Williams, see AI-driven demand as a primary inflation threat that might not be curbed sufficiently by the expected three quarter-point rate hikes.
• The scale of AI-related spending is enormous, with estimates projecting data center investments to reach between $1.1 trillion and $1.37 trillion within the next few years, alongside trillions more in software and services.
• Despite rising interest rates, tech giants ("hyperscalers") with strong balance sheets may continue aggressive spending, complicating the Fed’s efforts to cool inflation without negatively impacting other economic sectors like employment.