VP - Interest Rate Derivatives
Two Federal Reserve policymakers voted for a quarter-point hike even as the central bank held rates steady, exposing a split over how to fight inflation. AI investment complicates that fight, because capital pouring into AI infrastructure sits in a part of the economy that responds little to higher interest rates. Combined with an energy shock and tariffs, the result is inflation that the Federal Reserve's main tool struggles to reach, while rate-sensitive sectors such as housing take the strain.
Josh Cannington, StoneX VP of Interest Rate Derivatives, covers interest rates, monetary policy and how inflation feeds through to borrowing costs. That coverage gives insight into how AI investment, energy prices and tariffs are shaping the Federal Reserve's fight against inflation.
AI investment sits alongside the energy shock and tariffs among the inflation drivers that respond least to Federal Reserve rate hikes. The Federal Reserve is raising rates to battle inflation, yet "inflation is being driven by more or less interest rate insensitive areas," Cannington says. He questions how much a higher federal funds rate can slow the money pouring into the AI infrastructure build-out. Raising rates, in his words, is "a really imperfect tool for supply shocks", since higher borrowing costs produce no more energy and bring no relief at the pump. The burden consequently shifts to longer-dated borrowing costs, where signals of further hikes lift two, five and 10-year rates and add slow pressure on rate-insensitive sectors.
"It's not like interest rates aren't having an effect on the economy," Cannington points out, and the U.S. housing market shows it most clearly. Pending home sales have fallen to all-time lows, worse by an order of magnitude than during COVID-19 and the 2007 to 2010 downturn. Higher rates are reaching the rate-sensitive corners of the economy, whereas AI infrastructure spending keeps drawing capital. Businesses with floating-rate debt get no relief, and fixed rates offer little shelter because expected hikes are already priced in. According to Cannington, "It's just not having the effect on inflation that they want to see and, quite frankly, not quick enough."
Rate-insensitive inflation shows up first in the gap between headline and core U.S. consumer prices, with headline inflation running well above core. Pending home sales track how far higher rates are reaching interest-sensitive demand. Two, five and 10-year rates show how much of the Federal Reserve's guidance on further hikes the market has already priced in.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Josh Cannington, StoneX VP of Interest Rate Derivatives
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The Federal Reserve is raising rates against inflation that AI investment, an energy shock and tariffs leave largely out of reach. Housing is absorbing the pressure instead, with pending home sales at all-time lows while inflation lags.
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