A single minutes report mentioned it 18 times! AI is comprehensively penetrating the Federal Reserve's interest rate decisions.

The minutes of the Federal Reserve's July meeting show that policymakers mentioned AI 18 times in 15 economic discussions, warning that large-scale infrastructure spending is pushing up overall inflation risks and expressing deep concern about AI's capital structure, which relies on non-bank debt financing.

The Federal Reserve's core mandate is to achieve both price stability and full employment, but the current wave of artificial intelligence is profoundly disrupting this macroeconomic balance. In the newly released minutes of the July meeting, policymakers mentioned AI a staggering 18 times in the 15 paragraphs specifically discussing the current economic situation and outlook.

Monetary Policy Analytics economist Derek Tang offered a straightforward assessment of this high frequency of discussion. He stated, "AI is now influencing them from different angles—whether it's forecasting inflation, employment, or financial stability. It seems to be everywhere now."

On the price front, affected by a series of shocks including persistent tariff policies and soaring oil prices triggered by the US-Iran conflict, the US inflation rate has stubbornly remained above the 2% target for more than five consecutive years. Faced with price pressures that had cooled down but have now reignited, policymakers are beginning to be wary that AI investment may be fueling a new round of inflation.

The massive construction of computing infrastructure has directly driven up the procurement costs of chips and software, which in turn has a ripple effect on consumer products such as smartphones. Some officials at a July meeting argued that the impact of AI development on consumer prices is currently limited to specific categories.

However, several other participants warned that AI investments have already had a broader impact on overall prices by boosting aggregate demand, or will soon have such an impact. The disagreement over inflation stickiness directly impacted the recent interest rate decision.

Some policymakers believe that the current price pressures are only temporary and advocate holding rates steady; however, many, including the three officials who voted against raising interest rates at last month's meeting, still see dangerous signs of more widespread inflation.

Job restructuring and a high-stakes gamble on productivity

Beyond inflation, the disruption of the labor market caused by AI is also a headache for the Federal Reserve. This technology is ruthlessly destroying some entry-level white-collar jobs and more advanced computer programming work, while the large-scale construction of data centers is creating structural labor shortages in certain regions.

Dallas Federal Reserve President Logan specifically mentioned the chaos in western Texas earlier this summer. The construction of data centers around El Paso is directly leading to a severe shortage of local electricians, plumbers, and construction workers.

In response to this highly contradictory employment dynamic, the meeting minutes drew preliminary conclusions. A minority of participants assessed that the net impact of AI-related progress on employment to date appears to be limited, as the impact of some workers being replaced is precisely offset by others benefiting from the jobs created by AI infrastructure.

Since ChatGPT was launched to the public in 2022, the market has been expecting AI to enable businesses to achieve high growth without increasing or even decreasing their workforce, much like personal computers and the internet did in the 1990s. However, this productivity dividend that does not trigger inflation has yet to be reflected in macroeconomic data .

Nevertheless, economic officials in the Trump administration, as well as Walsh, the newly appointed Federal Reserve Chairman in May of this year, remain staunch technical optimists.

In a Wall Street Journal column last year, Walsh asserted that "AI will be a significant anti-inflationary force that will boost productivity and enhance America's competitiveness." He emphasized that a mere 1 percentage point increase in annual productivity growth could double living standards over an entire generation.

Capital backlash and security risks

While many Federal Reserve officials also hoped this productivity boom would materialize as soon as possible, they displayed extreme caution in the meeting minutes . Several participants acknowledged that considerable uncertainty remained regarding the precise timing and actual scale of the potential productivity gains.

Given this extremely high level of uncertainty, some officials directly issued warnings of a bubble. Meeting minutes show that they reminded the Federal Reserve to prepare for a scenario where AI promises fail to materialize; such a scenario, if it occurs, would "lead to a significant repricing of stocks, which in turn would negatively impact consumer spending."

A deeper concern stems from the surge in credit exposure within the financial system . The minutes specifically mention that capital expenditures in the AI sector are increasingly reliant on debt financing, with a significant portion of this credit coming from non-bank investors or regional banks.

Officials have issued stern warnings. This fragile leverage structure could put enormous pressure on financial institutions involved in AI lending should market pricing reverse sharply.

Cybersecurity was another major area of systemic risk that the Federal Reserve focused on at this meeting. This potential threat has already raised the highest level of vigilance among regulators.

In April of this year, the U.S. Treasury Department urgently convened a special meeting with executives from the country's largest banks. Jerome Powell, then still serving as Chairman of the Federal Reserve, also attended to discuss the deadly threat posed by emerging AI tools to financial cybersecurity.