Fed Split Over Inflation Outlook Amid AI Investment and Iran Conflict

The Federal Reserve’s rate-setting committee remains divided on whether inflation will stay elevated or ease as the Iran-Israel war subsides. Minutes from the June 16-17 meeting show “many” of the 19 officials expect the federal funds rate to stay at or just below the current 3.6 % by year-end, while an equal number foresee a higher rate. The vote to keep rates unchanged was unanimous, and new chair Kevin Warsh, appointed by President Donald Trump, did not submit a personal forecast.

Associated Press

Policymakers cite cooling gas prices and fading tariff effects as reasons inflation could decline, yet they warn that massive investment in artificial-intelligence infrastructure may sustain price pressures for semiconductors, computer equipment, and electricity. The conflict that began in late February between the United States, Israel, and Iran pushed inflation to a three-year high of 4.2 % in May, though gas prices have since fallen. Consumer-inflation expectations rose, with the New York Fed reporting a one-year-ahead expectation of 3.7 %, the highest in nearly three years, and a three-year expectation of 3.3 %, a four-year high.

Associated Press

Warsh told reporters on June 17 that the Fed remains committed to bringing inflation back to its 2 % target, a level missed for more than five years. He emphasized close monitoring of consumer expectations, though many officials place greater weight on financial-market indicators, which have been more stable. The minutes note that a few participants believed there was “a case for raising” rates at the June meeting but agreed to hold steady.

Associated Press

Some Fed members worry that the anticipated AI-driven demand for data-center power could embed higher costs into the economy, potentially making inflation more persistent. Others caution that expectations of sustained price rises could become self-fulfilling, prompting businesses to pre-emptively raise prices and workers to demand higher wages.

Associated Press

• “Many participants noted that ongoing strong demand for AI infrastructure would likely sustain upward pressure on prices for technology products and electricity,” — Federal Reserve minutes

Associated Press

• “But “many” also said that it would likely be higher by year-end.” — Federal Reserve minutes

Associated Press

• “a case for raising” — Federal Reserve minutes

Associated Press