Macro Matters The AI boom is putting pressure on the US economy

Inflation worries were growing at the Fed even before energy prices took another jump. This is Macro Matters and we're talking Fed policy. The minutes of June's meeting showed that a few policymakers already think there's a case to raise borrowing costs. Well, most participants think inflation could go one of two ways. Either it falls back towards the 2% target on its own, or it stays high enough to force a rise in rates. When that meeting was held, oil prices were coming down, of course, on the back of a ceasefire in Iran, but fresh airstrikes have since sent them back up. While Mark Fleming is Chief Economist at First American, Mark, it's clear from these minutes that the dynamics of inflation are unsettling some policymakers who think it could last well beyond the war. Why? There's so many things that are going on in the economy today. It's not just about energy or oil prices driving inflation. There's issues with the trailing end of tariffs, AI demand and capex spending, strong growth stimulus from the fiscal side of the economy. So, it's no surprise, actually, that there's a lot of variation in what they think they should do because there are a lot of moving parts at the moment. What longer term inflationary factors are worrying policymakers? Generally, there's overspending and the AI boom. That's basically putting a lot of pressure into other parts of the economy and sort of driving prices up for a lot of the inputs into the construction of data centres or the building out of the interiors of data centres with all the chips and things like that. And we already see some of those constraints coming to bear and pushing prices up. In addition, the labour market is still staying strong and wage growth is pretty good, in fact, above long-term trend at the moment. We have seen new hostilities with Iran, of course, in the last couple of days. How important is the situation in the Middle East to Fed policy? It certainly doesn't help. Technically speaking, the Fed will look through transitory non-core shocks such as this. But I think the bigger risk is that when there is an oil shock or a big spike in gas prices, if that persists long enough, it plays through into other parts of the economy and becomes more permanent and therefore more of a concern for the Fed. Has the U.S. economy proved more resilient to energy-driven inflation, though, than we thought it would be a few months ago, or is it too soon to say? Absolutely more resilient. I think the U.S. economy learned its lessons from the 1970s oil shocks and has become a lot less dependent in particular on energy or oil writ large, but also on other sources of it. So, it's certainly faring better than many other parts of the world. Do you think, though, that markets should be bracing for a rate rise fairly soon? I think so. Most of the participants or half of the participants suggested that the rate should be higher by the end of this year. All the evidence suggests that that's where inflation is possibly going. The market probabilities suggest that rates will be higher. So, yes, I think at least one rate increase before the end of the year. And what does that mean for the housing market? Is that already priced into mortgages or should potential borrowers move now because the situation is likely to get worse? I think it's basically being priced in as we speak, as of yesterday and today and tomorrow. Mortgage rates have already risen. The 10-year treasury is already on the rise even today. So, that's happening as we speak. And so, next week, people will already be experiencing higher mortgage rates because of it. But they're not materially higher than they were, say, last week. We're still in that 6.5% to 6.75% range. And I think people are just making decisions in the housing market regardless of rates at this point. Finally, Mark, the new Fed chair promised less forward guidance and generally less communication than we've been used to. Could that unsettle markets? Well, so far, those minutes were as long as they typically have been. Obviously, Kevin has only been in the job for a short period of time. They may get shorter. This forward guidance concept is relatively new. The markets have had lots less guidance in much of history of the Fed. And I think we will still all prognosticate no matter how much guidance we do or don't get. That was Mark Fleming of First American. Don't forget, you can watch more videos on Reuters.com. Thank you.