Fed Flags AI Demand, Middle East Conflict As Contributors To Inflation Pressures — FOMC Ready To Act 'Forcefully' To Keep Expectations Anchored

In the Monetary Policy Report released ahead of Chair Kevin Warsh’s semiannual testimony to Congress next week, the Fed said it remains committed to returning inflation to its long-term target of 2%.

• The Fed report also noted that increased spending on AI infrastructure, including data centers, has boosted demand for industrial metals and other materials used in building AI infrastructure.
• The report added that the U.S. economy has remained on solid footing amid tariffs, geopolitical tensions and evolving global supply chains.
• Warsh is scheduled to begin his semiannual testimony before Congress next week with an appearance before the House Financial Services Committee on July 14.

The Federal Reserve said in its latest Monetary Policy Report that demand for AI-related products and the Middle East conflict have added to inflationary pressures, while emphasizing that the Federal Open Market Committee (FOMC) remains prepared to act "forcefully" to ensure longer-term inflation expectations remain well anchored.

In the MPR released ahead of Chair Kevin Warsh’s semiannual testimony to Congress next week, the Fed said it remains committed to returning inflation to its long-term target of 2% and will use its policy tools as needed to keep inflation expectations well anchored.

“The Committee is prepared to act forcefully to ensure that longer-term inflation expectations remain well anchored,” the Fed said in its report, while adding that price stability is essential for a sound and stable economy.

Warsh is scheduled to begin his semiannual testimony before Congress next week with an appearance before the House Financial Services Committee on July 14.

The Personal Consumption Expenditures (PCE) Index advanced 4.1% in May on an annualized basis, the highest level since April 2023. PCE is the Fed’s preferred inflation gauge.

Core PCE, which excludes food and energy, rose 3.4% on an annualized basis in May, up 0.3% on a monthly basis. The annual reading of core PCE was the highest since October 2023.

The Bureau of Economic Analysis revised the first quarter (Q1) GDP upward to 2.1%, from its previous estimate of 1.6%, beating Wall Street’s expectations of 1.7% growth.

Fed Highlights The Dual Impact Of AI

The central bank highlighted that demand for products supporting AI has contributed to higher prices in some parts of the economy, particularly in computers, semiconductors and software.

The report also noted that increased spending on AI infrastructure, including data centers, has boosted demand for industrial metals and other materials used in building AI infrastructure, while supporting broader economic activity.

Manufacturing output has been bolstered by investment in AI-related infrastructure, while strong productivity growth has helped offset slower labor force growth. The Fed said these productivity gains have contributed to an increase in the economy's productive capacity.

Fed Sees Economy Remaining Resilient Despite Headwinds

The report said the U.S. economy has remained on solid footing amid tariffs, geopolitical tensions and evolving global supply chains. The Fed said consumer spending has continued to underpin economic activity, while business investment has remained resilient.

The report also noted that the labor market has stayed relatively healthy, with job gains continuing despite some easing in hiring. The Fed said the balance between labor demand and supply has improved, helping reduce inflationary pressures without a significant deterioration in employment.

“The gains in the first quarter were supported by robust growth in high-tech business investment and a bounceback in federal purchases following the government shutdown in the fourth quarter of last year,” the Fed noted.

The central bank also said layoffs have remained subdued while job vacancies have been nearly flat, suggesting that labor demand and supply are roughly in balance.

At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, gained 0.22%; the Invesco QQQ Trust ETF (QQQ) was up 0.26%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.25%. Retail sentiment on Stocktwits regarding the S&P 500 ETF was in the ‘bullish’ territory.

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