Normally, higher rates curb inflation by reducing borrowing, investment and overall demand. But Ackman argues that the potential returns from winning the AI race are so enormous that companies will keep spending heavily on data centers and computing power even as financing becomes more expensive.
“Why won’t higher rates at this unique moment in history therefore lead to more inflation as interest costs are embedded in everything?” Ackman asked.
The result, Ackman argues, could be a vicious cycle where higher rates fuel inflation, prompting the Fed to raise rates again. His warning comes as the hyperscalers, Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Meta Platforms (NASDAQ: META) and Microsoft (NASDAQ: MSFT), are expected to spend at least $650 billion this year on AI-related investments, according to Bridgewater Associates data.
The spending boom extends well beyond Big Tech. Gartner estimates that worldwide AI spending could reach $2.7 trillion this year alone.[a]
AI boom complicates the Fed’s inflation problem
The Fed’s September rate hike comes as inflation has reignited this year following the Iran war and resulting energy crisis, with higher energy costs pushing up headline measures such as the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) Index.
Inflation had plateaued before the latest energy shock, but it never returned to the Fed’s 2% target. Its renewed rise gave policymakers a major impetus to raise rates.
In fact, inflation has remained above the central bank’s target for 66 consecutive months[b] based on CPI and 65 months based on core PCE, the central bank’s preferred inflation gauge, according to the Mises Institute. Under the conventional monetary policy playbook, that persistence calls for higher interest rates.
However, as Moody’s Analytics chief economist Mark Zandi argued, the usual policy response may be less relevant today. The central bank is confronting an increasingly divided economy, with AI investment driving growth while other parts of the economy are already struggling.
Echoing Ackman’s concerns, Zandi warned before the September meeting that raising rates would be a “mistake.” Bringing inflation back to target, he argued, could require the Fed to either slow AI investment or put even more strain on the rest of the economy. [c]
“The challenge is even more complicated because AI-related investment appears to be powering the economy, while the non-AI economy is already struggling,” Zandi said in a September 13 X post. “To hit its inflation objective, the Fed either needs to rein in the AI boom or put even more pressure on the rest of the economy. Neither is a good outcome.”
