Fed Rate Hikes May Have Limited Effect as War and AI Boom Drive Inflation

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Federal Reserve policymakers led by Chair Warsh have signaled they are prepared to raise interest rates if inflation does not improve soon, but rate hikes may have limited effect on some of the forces currently driving prices higher. The August consumer price index, due out on the 11th, is expected to determine whether officials go ahead with a rate increase next week, and futures markets are pricing in roughly a 70% chance of a hike at the Federal Open Market Committee meeting on the 15th and 16th. Stephanie Roth, chief economist at Wolf Research, said the main factors pushing inflation above trend are the war with Iran, tariffs, and the semiconductor shortage, and added that one or two Fed rate hikes are unlikely to change the situation. Tariffs and energy prices, two of the biggest forces lifting inflation this year, are not especially sensitive to interest rates, and a third factor, AI-related capital investment, also appears insensitive to rates given the billions of dollars flowing into the sector. According to JPMorgan Chase, announcements of data center capital investment continue to mount and could reach 5.5 trillion dollars, roughly 849 trillion yen, in total by 2030.

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