Federal Reserve Semi-Annual Policy Report: Tariffs and the Middle East push up inflation, AI becomes a double-edged sword

Federal Reserve Semi-Annual Policy Report: Tariffs and the Middle East push up inflation, AI becomes a double-edged sword.

On Friday local time, the Federal Reserve released its semi-annual monetary policy report to Congress on its official website, reaffirming the Federal Open Market Committee (FOMC)'s determination to achieve price stability and being wary of the dual inflationary pressures of energy and AI.

Market focus will be on Federal Reserve Chairman Kevin Warsh's speech at a congressional hearing next week as chairman of the Federal Reserve. The Federal Reserve said that the U.S. real GDP annualized growth rate moderately rebounded to 2.1% in the first quarter, which was the same as last year’s growth rate.

The growth momentum comes from two major sectors: investment by high-tech companies has strengthened significantly; and federal government procurement spending rebounded after the government shutdown in the fourth quarter of last year. In the first five months of this year, the average annualized growth rate of U.S.

household consumption was only 1.3%, which was relatively weak. The real estate market continues to be sluggish, with existing home sales and single-family new home construction basically showing no growth during the year.

Manufacturing output has increased significantly, and the core driving force is the expansion of demand for related equipment brought about by the construction of AI computing power data centers. The growth rate of labor supply has slowed down, but labor productivity has grown strongly, and the overall economy's production capacity has steadily expanded.

As one of the two major responsibilities of the Federal Reserve, inflation will heat up again in the spring of 2026. The overall PCE and core PCE will be significantly higher than the 2% target.

There are three major sustained price pressures: First, the geo-energy supply impact in the Middle East and the US-Iran conflict continue to interfere with shipping in the Strait of Hormuz. The rise in crude oil prices will push up the cost of gasoline and industrial energy in the United States.

Energy inflation will be transmitted to the entire industry chain; if the conflict becomes protracted, the stickiness of inflation will further increase. Secondly, the price transmission of tariff policy lags behind. The cost of additional tariffs in the early stage continues to be transferred to end consumer goods.

Residential commodity prices are under pressure and it is difficult to fall back quickly in the short term. Third, the expansion of AI computing power has brought about structural demand inflation.

Global cloud manufacturers have massively expanded data centers, and the demand for HBM, DRAM, GPU, and electricity has exploded, pushing up the prices of chips, electronic equipment, and industrial raw materials.

This will exacerbate inflation in the short term, but in the long term, AI's improvement in labor productivity is expected to alleviate price pressures, and there is a time lag. Another major responsibility is that the labor market tends to be balanced. After a period of cooling, supply and demand in the labor market have returned to a rough balance.

The unemployment rate in June was 4.2%, a historically low level with minimal fluctuations since last summer. The scale of layoffs has remained moderate this year, the total number of job openings has remained roughly flat, and the number of new private sector jobs has picked up.

The inflow of immigrants has slowed down significantly and the aging of the population has led to a continued decline in the labor participation rate and a slowdown in the growth of labor supply. Nominal wages have grown steadily, labor productivity has increased significantly, and unit labor cost pressures have been controllable.

Financial stability and global risks The Federal Reserve believes that the U.S. financial system is overall sound and has adequate risk resistance, and the level of systemic risks has remained basically unchanged since the beginning of the year.

The valuations of the three major asset sectors of stocks, corporate bonds, and residential real estate are all higher than the historical center; the proportion of total debt of non-financial enterprises and residents to GDP continues to fall slightly, and is currently the lowest level since the beginning of 2000; the leverage ratios of hedge funds and

large life insurance institutions are still higher than the historical average; the adequacy of bank risk regulatory capital is at a high level in recent decades, and the sensitivity of bank assets and liabilities to fluctuations in long-term U.S. bond yields has decreased.

The overall growth of overseas economies is sluggish, dragging down factors including conflicts in the Middle East and US tariff policies; the investment boom in the AI industry chain has offset the downward pressure to a certain extent. Overseas overall inflation has increased significantly, with rising energy and commodity prices being the main cause.

Overseas factory prices for industrial products have risen simultaneously, and the risk of imported inflation has spread. As a result, many central banks have raised policy interest rates; other central banks have also strengthened their anti-inflation stance despite facing pressure from a weakening economy.

Overseas stock markets rose, but sovereign bond yields in various countries rose simultaneously. The U.S. dollar's trade-weighted exchange rate has appreciated slightly since the beginning of the year, and the actual exchange rate remains stronger than the historical average.

On July 14 and 15, Kevin Warsh will appear before the House Financial Services Committee and the Senate Banking Committee respectively. This will be his first congressional hearing after taking office as Chairman of the Federal Reserve.

The market will not over-interpret the written report, but will pay close attention to Warsh's verbal statement to capture three key pieces of information, including whether the Fed has room to raise interest rates during the year and whether the rate hike will be in October or December; policy responses to oil prices and energy inflation in the Middle East; and judgments on the overheating of the AI industry and economic resilience.

The previous conflict between the United States and Iran once pushed up oil prices and inflation expectations, and the market priced in the risk of the Federal Reserve raising interest rates; combined with the release of June U.S. CPI core inflation data next week, this hearing and the inflation data will jointly determine the short-term trends of U.S.

bond yields, the U.S. dollar, and U.S. technology stocks. If Warsh takes a hawkish stance, it will further strengthen expectations for interest rate hikes and suppress the overvalued semiconductor and AI sectors; if a signal is released that inflation is controllable and interest rate hikes are on hold, risk assets are expected to recover. (

#Stocks #Nvidia #AI #Semiconductors #Fed