The Federal Reserve is extracting the AI buildout’s inflationary cost from the labor market — under cover of data dependency.
The minutes from the June 16-17 Federal Open Market Committee meeting, released Wednesday, document the mechanics. The committee held the federal funds rate at 3.6 percent on a unanimous 19-0 vote. The internal division is structural: half the policymakers projected a rate increase by year-end; half projected the rate unchanged or lower. The fault line is not a disagreement over whether inflation is elevated — May’s 4.2 percent reading is a three-year high — but over the attribution of the price pressure. The late-February geopolitical shock from the U.S.-Israel strike on Iran is receding, gas prices are falling, and the persistent impulse, the minutes state, is “ongoing strong demand for AI infrastructure” sustaining “upward pressure on prices for technology products and electricity.”
The committee is staring at a physical resource conflict and treating it as a generic demand-overheating problem. The AI capital expenditure is absorbing electrical grid capacity and semiconductor fabrication, driving up input costs for the rest of the economy. Apple’s price increases on laptops and iPads are the leading indicator, not the whole picture. When Chair Kevin Warsh led his first meeting as inflation held above target, the policy question was still calibrating to the immediate geopolitical and energy shock. The minutes released this week reveal the structural reality: the real-resource squeeze of the AI buildout is now the baseline inflationary impulse, and the FOMC’s response is to manage it through the blunt instrument of the federal funds rate. Monetary tightening suppresses wage growth and household borrowing capacity to cool aggregate demand, forcing the labor market to absorb the price pressure generated by the technology sector’s physical consumption of electricity and silicon.
The distributional incidence of this choice is visible in the New York Fed’s June Survey of Consumer Expectations, released Tuesday. One-year inflation expectations rose to 3.7 percent — the highest in nearly three years. Three-year expectations climbed to 3.3 percent, a four-year high. The FOMC’s more-than-five-year miss on the 2 percent target is unraveling the expectations anchor. The committee’s reliance on financial-market measures of inflation expectations, which the minutes note are “lower and more stable than consumer surveys,” is a choice to prioritize the asset-pricing transmission channel over the wage-price transmission channel. By tolerating un-anchored household expectations while keeping market-implied expectations contained, the committee preserves the low long-rate volatility and contained risk premia that allow the AI buildout to keep borrowing against scarce physical inputs. The cost differential between anchored asset holders and un-anchored wage earners widens accordingly.
The chair declined to submit a forecast. Eighteen of the nineteen FOMC participants submitted economic projections to the Summary of Economic Projections. Warsh, confirmed by the Senate Banking Committee on a 13-11 party-line vote earlier this year to succeed Jerome Powell, did not. His stated reason, as recorded in the minutes, was that submitting a forecast can lock policymakers into a specific approach. The chair who will set the agenda for the Federal Open Market Committee, who will frame the language of the post-meeting statement, who will conduct the press conference — that chair declined to commit to a forecast for the very year he is tasked with delivering price stability. Data dependency, in the chair’s hands, means declining to commit to what the data say.
This is a maneuver with a forty-year lineage. The 1970s inflation episode featured a series of “transitory” and “structural” excuses — the oil shocks, the productivity slowdown, the wage-price spiral — that postponed monetary policy action while inflation expectations un-anchored. The episode ended when Paul Volcker, appointed Fed chair in August 1979, stopped accepting the excuses and broke the cycle. The cycle remains unbroken. The Fed has tools. It can raise the federal funds rate. It can communicate an intent to keep rates higher for longer. It can hold rates at a level restrictive enough to bring inflation back to the 2 percent target. It did none of those things in June. A few officials saw a case for raising the rate and agreed to hold anyway.
The price level is the price level, and the physical economy is the constraint. The FOMC cannot print electricity or semiconductor fabrication capacity; it can only restrict the dollar cost of those constrained resources. The necessary reform is real-resource accounting: the committee must treat physical capacity constraints as a distinct category from aggregate demand overshoot, perhaps by publishing a quarterly physical-capacity index alongside the Summary of Economic Projections, and coordinate with fiscal and industrial authorities to allocate the physical inputs rather than relying exclusively on the federal funds rate to ration the scarcity. The 19-0 vote to hold the rate steady was a procedural unanimity masking a substantive failure to allocate the inflationary cost to the sector creating the physical scarcity. The Committee meets again on July 28. The next minutes will be released in August. The arithmetic will not have improved. The Fed has tools. It is not using them. That is the choice.