High Interest Rates Aren’t Slowing the A.I. Boom. That’s a Problem for the Fed.

The Federal Reserve has a conundrum on its hands as it tries to tame elevated inflation. One of the primary drivers of today’s growth, and the price pressures that have followed in its wake, appears nearly immune to the higher interest rates that the central bank has begun to impose on the economy.

Companies’ seeking to expand their artificial intelligence abilities have been undeterred by not only U.S. borrowing costs that have recently reached multi-decade highs, but also soaring costs for electricity, high bandwidth memory and other inputs that are crucial to continued growth.

The implications for the Fed are vast, if price pressures do not ease as many policymakers expect in the coming months. To return inflation to the Fed’s 2 percent target, the central bank might need to tighten the screws on the economy more than otherwise would be the case to sufficiently slow down activity. The brunt of that adjustment will fall predominantly on industries more sensitive to higher rates, such as housing and the automotive sector, and in turn the people employed by the companies in those fields. Depending on how much the Fed ends up needing to choke off demand, the labor market, which is already starting to cool, could start to crack.

“The problem for the Fed is that there is usually a built-in correction mechanism in the U.S. economy in which interest rates rise and at some point, the rate-sensitive parts of the economy, led by housing, slow down hard, and that then propagates to the rest of the economy,” said Ajay Rajadhyaksha, global chairman of research at Barclays.

“But if a large part of the economy is just less rate sensitive and that is what is pushing the economy to grow faster, then the Fed, unfortunately, has to hurt the part of the economy that is more rate sensitive.”

The scale of the A.I. buildout is so immense that it is measured in numbers usually associated with government spending on national defense or health care, not private-sector investments. In a recent paper, Stijn Van Nieuwerburgh, an economist at Columbia University, estimated that spending on A.I. chips, data centers and the electrical systems to power them would exceed $10 trillion from 2025 to 2032. That is more than 3.6 percent of total U.S. economic output each year.