[Just before the FOMC] Why you can't rest easy even if interest rates are held steady. The real protagonist was 'AI investment'

Let me start with the conclusion.

For this FOMC, the market’s main scenario is that rates will be held steady in October, with a rate hike in December being the real focus. However, what we should pay attention to is not the interest rate figures themselves, but the fact that the Fed has started saying that ‘AI investment is causing inflation’.

This is not an irrelevant story for those who own AI stocks, those who have mortgages, or those who are concerned about the yen exchange rate.

1. A ‘hold’ in October is almost certain

The FOMC will be held on October 27-28, and the prevailing view is that the policy interest rate, which became 3.75-4.00% following the September rate hike, will be held steady. In prediction markets, the probability of a hold exceeds 90%, and a rate hike in December is seen at around 77%.

That December rate hike is also becoming quite solidified within the Fed. In the minutes of the September meeting, many participants assessed that another rate hike within the year would likely be appropriate. Moreover, 16 out of the 18 people who provided forecasts expect an additional rate hike.

In other words, this hold is not the ‘end of rate hikes,’ but a short break before the next move.

2. Inflation perception shifts to ‘persistent’

The September CPI was 3.7% year-on-year, which is reported to have accelerated from 3.4% in August. According to Reuters, this unexpectedly strong inflation statistic caused stocks to fall and strengthened the view that the Fed will be forced to raise rates further.

Note that on this point, some sources write that ‘prices have settled down,’ so evaluations are divided. This article adopts the view that ‘inflation is persistent,’ which is closer to the reports from news agencies.

3. The unexpected culprit is ‘AI investment’

This is the most interesting part this time. Fed officials have begun to name the AI boom itself as an inflationary factor.

• President Collins stated that the rush to build data centers is pushing up price indices fxstreet

• Governor Cook also pointed out that AI investment is creating price pressure through data centers, energy, and construction.

• In the background, there are data center plans exceeding $1.5 trillion

• Chicago Fed President Goolsbee has warned that AI-related investment is starting to look like overheating of the entire economy

• Governor Warsh has described AI investment as a ‘shock’

The mechanism is simple. Building data centers requires semiconductors, electricity, construction materials, and labor. Since demand comes before supply can catch up, prices rise. The ‘benefit’ of AI productivity improvement comes later, while the ‘cost’ of rising prices comes first.

However, this does not mean that AI is entirely inflationary. The Fed’s own report states that this is an effect of supply bottlenecks and is not evidence that AI is uniformly inflationary. According to CIBC’s estimates, AI’s contribution to inflation in 2026 will be about 0.4 percentage points, and the peak of its impact on the inflation rate may have already passed.

4. Will AI investment continue? 3 scenarios

I have organized my thoughts as follows.

Scenario A: Investment continues despite high interest rates (Main)
Order backlogs are piling up, and demand is backed by substance. Reuters also reports that order backlogs for data center-related companies are expanding. However, financing costs are certain to rise, and ‘selection’ in investment will proceed. coloradobiz

Scenario B: Investment slows due to rising interest rates
The Fed cites increased borrowing for AI as one of the factors behind the rise in long-term interest rates. If rate hikes continue, projects with delayed monetization will face difficulties. This is likely a movement closer to an ‘adjustment’ rather than an ‘AI bubble burst’. CNBC

Scenario C: Inflation settles naturally
Reuters suggests that lower oil prices due to the resolution of the Iran war, the suspension of tariffs, and constraints from local opposition to data center construction could be tailwinds for the Fed. In this case, rate hikes will stop after one more.

5. What will happen to us in Japan

• Exchange rates: If US interest rates remain high, the dollar will likely remain strong and the yen weak. This will affect daily living costs through import prices.

• Stocks: AI-related stocks will be in a tug-of-war between ‘strong earnings but vulnerable to interest rates’.

• Loans: It is important to note that the rise in US interest rates is likely to spill over into Japan’s long-term interest rates.

My View

What we should look for in this FOMC is the tone of the statement and the press conference rather than the result of a ‘hold’.

Of particular note is Chair Warsh. According to CNBC, the Chair rejects traditional forward guidance and keeps distance from the interest rate forecasts of other officials. Since he is the type of Chair who does not tell you in advance that ‘the next one will be a hike,’ the market will move based on his remarks even if a December rate hike is already priced in. CNBC

In my opinion, AI investment will not stop. However, I see it shifting from ‘an unconditional growth story in the zero-interest-rate era’ to ‘an era where only companies that can withstand the cost of capital will survive.’ What is required of investors is not to ‘buy because it is AI-related,’ but to have an eye for selecting based on ‘whether they can generate profits even with high interest rates.’

3 points to look for in the announcement

1. Whether there will be dissenting votes (members advocating for a rate hike)

2. How the expression of ‘inflation’ will change in the statement

3. How AI investment will be mentioned in the press conference

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This article is for informational purposes only and does not recommend the buying or selling of any specific financial product. Please make investment decisions at your own risk.