The Federal Reserve remains divided on the path forward, and a new threat is already on the horizon: the effects of an AI bubble. The minutes of its last meeting, last Januaryconfirm that the two camps, those who want to continue lowering rates and those who prefer to wait, remain intact. In addition, some already warn that the option of uploading them again if necessary should not be ruled out. In the background, the fear of a market with a risk of overvaluation and the expectation that AI can cool inflation in the medium term.
The document confirms that the debate continues among Fed officials about the future of interest rates. The latest economic data has confirmed that inflation continues to decline and that downside risks in the labor market appear to have slowed. A combination that should open the door to more rate cuts in the coming months, but that continues to raise controversy in the Committee, since the PCE, its favorite measure, remains at 3%, one point above its objective.
Thus, the last debate showed two groups: those who want to lower rates in the next meetings if inflation continues to moderateand those who prefer to wait a few more months before making a decision. Both positions seem to converge in the place that the markets expect: a reduction in June, once the time requested by the seconds to ensure that inflation is controlled has passed, and the best way to start for the probable new president of the Fed by then, Kevin Warsh, if there is no block to his appointment.
However, one group has issued a warning that until now had not appeared in these meetings: the specter of a new rise: “Several participants indicated that they would have supported reflecting the possibility that raising interest rates might be appropriate if inflation remains above target”the document states.
For the moment, the Fedwatch tool reveals that market expectations remain intact, especially after this week’s CPI data, better than expectedwill cool the expectation of a rebound in inflation. In any case, the chances of a cut at the next meeting, in March, have cooled slightly.
The Fed focuses on AI
The development of artificial intelligence played a leading role in the Fed debate at the January meeting. The members of the Federal Open Market Committee raised several key aspects about AI, both for its economic impact on inflation and employment, which can mark the future of monetary policy, and for the possibility that a bubble has formed in the financial markets with investment in AI as the protagonist.
First, several members of the Fed admitted the possibility of AI generating an increase in productivity that would be a boon to the central bank’s mandatesince it would support a cut in inflation.
After most members recognized that the upward pressures on inflation are being generated by tariffs, and that these are being clearly seen in goods (excluding energy and food), and also after considering that these pressures will probably be reduced in the coming months, the members of the Committee raised the possibility that the expectations of seeing improvements in productivity due to AI will be fulfilled.
“Several participants are waiting an increase in productivity associated with technological development, which will exert downward pressure on inflation. In line with that vision, several participants mentioned reports of contacts with companies that are automating more and more operations,” the document highlights. This “could reduce the need to pass on increased costs to consumer prices, or reduce margins”the minutes state.
However, they also discussed the danger posed by AI for the labor market, the other objective of the Fed’s monetary policy, beyond inflation (employment stability): “Almost all participants observed that, although the level of layoffs remains low, it is also low in hiring. In line with this observation, several participants assured that their contacts with companies continue to indicate caution when hiring, a reflection of the uncertainty in the economic outlook generated by AI and other automation technologies for the labor market,” the minutes explain.
Finally, The members of the Fed admit, and raise, the danger that a bubble could have formed in the financial markets with AI as the protagonist: “In the debate on financial stability, several participants commented on the high valuations and low credit spreads that exist. Some members discussed the potential vulnerabilities associated with recent developments in the AI ​​sector, including high stock market valuations, a high concentration in certain securities and in the activity of a few companies, in addition to the increase in debt,” the document states.
Market reaction
The Fed’s minutes have reduced the chances of a push to ease monetary policy, which has caused a slowdown in gains on Wall Street. The North American markets, which have been trading in the green for most of the day, have taken their foot off the accelerator. Thus, the Dow Jones, which has risen by 0.7%, has experienced advances of 0.17% after the publication of the central bank’s minutes, while the S&P 500, which has risen by 0.95%, has slowed down to register increases of 0.47%.
For its part, The Nasdaq 100 has been sensitive to the information provided by the Fedin which the dangers linked to AI are mentioned, such as stock market overvaluation and concentration. This indicator, which has registered increases of more than 1%, has slowed down to advance by 0.65%. At the same time, the ten-year bond yield rises one basis point to 4.08%. All this while the volatility index, the VIX, has cut its declines, going from falling by more than 8% to falling by more than 1%.