Fed Minutes Add AI to Inflation Worry List; Chip Demands Chip Away at Rate-Cut Hopes 🧠

Federal Reserve officials identified robust artificial intelligence-related investment as an emerging driver of inflation at the June 16–17 Federal Open Market Committee meeting, joining tariffs and Middle East-linked supply disruptions as upside risks to prices, according to meeting minutes released Wednesday. The minutes from the first policy meeting under Fed Chair Kevin Warsh showed that most participants viewed strong demand for AI infrastructure as likely to "sustain upward pressure on prices for technology products and electricity," a phenomenon increasingly referred to as "chipflation." Several officials also pointed to AI-driven business investment as a factor that could keep economic activity above its long-run potential, contributing to more persistent inflationary pressures. At the same time, some participants acknowledged that wider AI adoption could eventually lift productivity and lower production costs, though they judged those benefits would take time to materialize.

The committee voted to keep the federal funds target range unchanged at 3.50% to 3.75%, reiterating its commitment to returning inflation to its 2% objective. Updated economic projections showed officials raised their median forecast for 2026 PCE inflation to 3.6% from 2.7% in March, while the median projection for core PCE inflation increased to 3.3% from 2.7%. The median expectation for the federal funds rate at the end of 2026 was lifted to 3.8% from 3.4% three months earlier, and the Fed's dot plot showed nine of 18 voting members projecting at least one rate hike before the end of 2026, with six expecting two 25-basis-point increases. Participants said the labor market remained broadly balanced and that wage growth was no longer a significant source of inflationary pressure, with the unemployment rate projected to stay close to current levels.

In scenarios in which inflation remains elevated and fails to fall toward 2%, almost all participants indicated that some policy firming would be necessary, while in scenarios in which inflationary pressures ease, almost all said it would likely be appropriate to maintain or eventually lower the federal funds rate. CME futures markets currently show a 70% probability that rates will remain unchanged at the next meeting on July 29. Nick Ruck, director of LVRG Research, said the Fed's recent meeting highlights how the AI infrastructure buildout is "driving higher inflation through surging demand for semiconductors, energy and data centers, even as it promises future productivity gains," adding that the pressure "underscores the need for innovative solutions in decentralized technologies to optimize resource allocation and ease bottlenecks in the digital economy." Crypto investors continue to monitor Fed policy closely because expectations for interest rates influence liquidity, Treasury yields, and the U.S. dollar, all of which affect demand for risk assets including $BTC and $ETH.