See How is AI influencing interest rates? Investment, productivity, prices, and more by Jeff Horwich of the Federal Reserve Bank of Minneapolis. Excerpts:
"From $200 billion in 2024, capital spending by the five largest investors in AI data centers—Alphabet, Amazon, Meta, Microsoft, and Oracle—is projected to approach $1 trillion by 2027. “For reference, total private investment in the economy is about $5.5 trillion dollars,” said Minneapolis Fed Monetary Advisor Alisdair McKay. “We’re talking about 20 percent of investment coming from this one category.”
All else equal, this surge in data center spending and demand for investment funding would constitute strong macroeconomic forces pushing real interest rates higher.1 But for all the lofty projections, AI-related investment is not moving the needle much at an economy-wide level.
Despite an unmistakable leap in an AI-relevant category like information processing equipment (Figure 1, right axis), the growth path of U.S. aggregate private investment looks similar to the trend since 2010 (Figure 1, left axis).
As a proportion of U.S. GDP, McKay notes that private investment remains roughly flat since 2018. So far, the AI boom does not resemble prior periods of investment growth in the 1990s and 2010s. Breaking investment down into its four primary components shows part of the reason: The shares of housing investment—and, to a lesser extent, investment in nonresidential construction—are falling (Figure 2).
Current nominal interest rates are elevated from the ongoing battle to vanquish inflation, which depresses or postpones investment in those rate-sensitive construction categories. Intense investment demand for AI data centers also drives up costs for construction inputs and could attract funds that might otherwise go into housing. The net result is something of a wash from a macroeconomic perspective. “You would think that if you have this great opportunity” to achieve future growth by investing in AI, McKay said, “you would increase the amount you invest. But we have not done that in the aggregate.”
Minneapolis Fed Monetary Advisor and Assistant Director of Policy Cristina Arellano notes that while the technology sector represents about 15 percent of U.S. output, it comprises only 7 percent of U.S. consumption. As many economists understand it, this investment-driven economic growth puts less pressure on underlying interest rates than if spending were driven by a more consumption-heavy category.
“The natural rate [of interest] is more linked to the consumption growth rate, in terms of the frameworks we use to think about this,” Arellano said. Growth focused in the tech sector “may have a smaller effect on the natural rate because it’s not affecting consumption so much.”
In many economic models, household and investor expectations of the future can make a big difference today. If people expect to be richer down the road, they spend more today and even borrow against that future income. This would tend to increase real interest rates as the supply of savings shrinks, especially in the context of high investment demand.
If, on the other hand, people worry about their jobs or the prospects for their children, they might tend to save more as a precautionary measure, having the opposite economic effect. Pessimism about the future tends to keep rates in check today.
This classic “consumption smoothing” dynamic comes up often in speeches and papers about the macroeconomic impact of AI. Researchers analyzing significant movements of bond yields around major AI announcements interpret them under this theory.
For all the utopian-to-existential talk about AI around American dinner tables, Arellano and McKay are skeptical that households are behaving like the economic models. “I don’t think there are that many people who connect that future—where all of us, where the economy is richer—with, ‘I’m going to be richer,’” said McKay.
As for the scenario of fear-based savings pushing rates down, Americans are showing no evidence of precautionary saving. The U.S. personal saving rate has been generally falling since AI hit the public consciousness and sits now near historically low levels.
However, beliefs about the future of AI are likely influencing current consumption and interest rates through another channel: Soaring stock wealth. Since ChatGPT debuted to the general public in November 2022, the S&P 500 stock index has risen 80 percent (as of late July 2026), driven by shares of tech companies associated with AI. “We think that the marginal propensity to consume out of stock wealth is about 3 cents on the dollar,” said McKay. “So that would mean, ballpark, one-half to 1 percent of GDP in consumption each year from this extra wealth. That’s pretty big.”
The wealthiest 10 percent of U.S. households own almost 90 percent of American stock and mutual fund holdings; the richest households also account for a disproportionate amount of spending. Their consumption, supported by these equity gains, has helped sustain demand despite low sentiment among consumers overall."
"optimism . . . could motivate relatively stronger U.S. consumption from AI-related wealth. This demand keeps the economy and inflation running hotter, an argument for higher policy rates.
Aggregate consumer demand is held somewhat in check, however, by the concentrated nature of AI-based wealth and by caution among consumers with lower wealth and income. AI-inspired spending is “not for every segment,” Arellano said, “especially for young people graduating from college.”"
"Relative price changes happen all the time; they do not necessarily portend general inflation. But with core consumer inflation persistently above the Fed’s 2 percent annual target, policymakers might take note of categories where price increases are not only above historic averages but accelerating—as is the case for computer-related equipment. Rising prices for metals, power, and information technology could pass more widely into the business costs for firms.
Policymakers generally “look through” supply shocks expected to temporarily affect relative prices, such as a one-time increase in tariffs or the war in Iran. “The AI impact seems like it could be more persistent,” said McKay, with data center investment possibly reaching into trillions of dollars and stretching years into the future. If so, this might incline policymakers toward higher interest rates to contain wider price increases and keep inflation expectations anchored."
"AI tools could bring a leap forward in helping companies adjust prices more frequently and precisely. AI could turbocharge what economists call “price discrimination”—think of it as personalized pricing—“by facilitating the real-time analysis of consumer demand and price elasticities,”"
"a world of instantaneous price adjustments and pass-through of costs could amplify inflationary events. It could also make central banks’ jobs more difficult. “Those frictions shape the transmission of monetary policy,” said Arellano. What economists call “nominal rigidities” of prices (and wages) are understood to play a crucial role in translating the Fed’s policy moves into reactions across the economy."
"there is a prominent counterargument that AI will restrain price increases or even drive many prices down. Recent findings by European researchers found that a higher share of AI adoption by firms corresponded with lower inflation in those sectors, with the productivity gains from AI a possible “structural force dampening inflation.”"
Some Fed members think "productivity gains associated with AI adoption would eventually reduce production costs and increase aggregate supply, which should put downward pressure on inflation"
"these effects are not yet meaningfully apparent at a macroeconomic level, where headline and core price indexes remain elevated. Nor are they evident for the task where AI has been most immediately and heavily put into action: computer coding. The consumer and producer price indexes for software, historically deflationary, instead show flat-to-rising prices since generative AI came on the scene. Importantly, these measures also reflect AI-driven hardware price pressures.2 Nonetheless, they display no ground-level signal of productivity leading to disinflation—quite the opposite."
"For the information services sector and the subsector that includes software, rough calculations of productivity through 2025 (real output-per-worker) are consistent with levels over the past 20 years. A large jump in 2023 coincides with the introduction of ChatGPT. But that is followed by four quarters of productivity declines. Rising productivity through 2025 is tantalizing, but within normal, historic fluctuations."
"“If you look back at other types of technological adoption—electricity, computers—they took decades to manifest in terms of changing production processes and getting the productivity benefits,” said McKay. “From a macro perspective, the main thing we are doing right now is ‘building the machine.’”
McKay points out a disconnect between the tasks most likely to benefit initially from AI and the physical investment that puts demand-side pressure on the economy. “I don’t see that the productivity benefits are going to show up in a way that makes it easier to build a data center,” he said.
Researchers have documented a J-shaped pattern to the adoption of general-purpose technologies. Measured productivity actually decreases at first, as companies implement investments in retraining, reorganization, and updating equipment. Although AI awareness and experimentation are arguably spreading faster across the economy than prior technologies, similar frictions are already appearing."
"The unemployment rate has held steady amid a persistent “low-hire, low-fire” labor market. AI has been cited for some notable layoffs in the tech sector, even as a broader study of 21,000 U.S. firms found AI adoption is associated with additional hiring."
"monetary policy has little influence over structural changes wrought by technology. Nor do central banks tend to respond to scenarios in the uncertain future. Fed policymakers are focused on today’s data, where productivity gains are a work in progress and jobs are holding steady. Data center investment, wealth-driven consumption, and possibly pricing forces are creating heat—but this appears moderate in the aggregate, for now.
“In the near term, whatever increase in the productive capacity of the economy AI has brought, AI has brought a larger increase in demand,” McKay said. Big changes could still be on the way for the economy, maybe sooner than later given the speed of AI investment, awareness, and diffusion. But we are still near the start of the journey.
“It’s hard to just implement things really quickly, then adapt and change,” said Arellano. “These processes are sort of slow. But I do think there will be a lot of gains in the medium term.”"
