21/05/2026
From the key signals in the bond market, the continued prosperity of artificial intelligence (AI) will only add to the inflation woes facing Kevin Wash.
The incoming Federal Reserve Chairman has previously sharply criticized the Federal Reserve, arguing that it failed to recognize that breakthroughs in AI would boost productivity, thereby generating “significant deflationary forces” that would make it easier for policymakers to cut interest rates.
However, as Wash is set to take office on Friday, and with war-induced price shocks pushing the 30-year U.S. Treasury yield to its highest level in nearly 20 years, Wall Street analysts say a widely used market indicator shows that the current impact of this technology on inflation and the trend of borrowing costs is precisely the opposite of Wash’s expectations.
This market indicator is the so-called five-year real interest rate. Its data shows that the Federal Reserve’s benchmark interest rate needs to be about 2 percentage points higher than the inflation rate in the medium term to be regarded as the neutral rate of interest—an interest rate level that neither stimulates nor suppresses economic growth. Given that the Federal Reserve’s current interest rate is about 3.6%, which is still below the inflation level, this indicates that monetary policy is still stimulating the economy, thereby greatly narrowing the room for Wash to cut interest rates in the future.
The estimation of the neutral rate of interest is affected by many factors, including forecasts for long-term economic growth and inflation. Central bank officials have also admitted that it is difficult to accurately determine the specific value of the neutral rate of interest.
But analysts point out that the emerging AI boom is constantly pushing up the level of the neutral rate of interest. The core reason is that the development of AI has increased the market demand for capital, thereby exacerbating inflationary pressures, which is specifically reflected in two aspects:
On the one hand, the four largest technology companies alone plan to invest more than $700 billion this year in the construction of data centers, computer hardware and power infrastructure. Large-scale capital investment has directly amplified capital demand.
On the other hand, the surge in global demand for AI-related semiconductors has spawned the so-called “chip inflation,” which has directly pushed up the prices of semiconductors and their related products. In the United States, the price of computer software and accessories rose by 14% year-on-year in April; analysts also pointed out that the price of DRAM chips used for storage memory has soared 17 times in the past year. In addition, technology companies such as Microsoft and Meta Platforms have also raised the prices of some products, further exacerbating inflationary pressures.
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