Apollo Chief Economist: The Stronger AI Gets, the Higher Inflation Rises, and the Harder It Is to Cut Interest Rates

```

The surge in AI infrastructure construction is becoming a new variable in Federal Reserve monetary policy. Apollo Global Management’s Chief Economist Torsten Slok warns that large-scale AI construction in its initial phase will push inflation higher, making it difficult for incoming Fed Chair Kevin Warsh to achieve the rapid rate cuts he hopes for.

Slok said on Bloomberg TV Monday, "The AI craze is definitely inflationary in the early stage, and we may need to wait for some time." He pointed out that price pressures "are very clearly visible in semiconductor prices, energy prices, and the labor market." This assessment directly challenges Warsh’s previous policy expectations—Warsh had advocated that productivity gains from AI should open the door for more accommodative monetary policies.

Currently, market expectations for Fed policy direction have shifted significantly. Traders now estimate there is about an 80% chance the Fed will hike rates this year, with the AI construction boom driving up costs for chips, electricity, and more as a key force. The Personal Consumption Expenditures (PCE) price index rose 3.8% year-on-year in April, the highest since 2023, and inflation stubbornly remains above the Fed’s 2% target.

Early phase of AI construction: A new source of inflationary pressure

Slok’s core argument is that the economic impact of AI infrastructure building has distinct phases. In the early stage, large-scale capital expenditure will significantly boost inflation, rather than curb it.

America’s largest technology companies plan to invest as much as $725 billion in capital expenditures this year, mainly for AI data center equipment. This huge wave of investment directly pulls up demand for semiconductors, energy, and labor and creates price pressure on the supply side. Slok stated clearly, "We should actually expect AI data center construction to be inflationary in the early phase, rather than disinflationary."

In addition, delayed tariffs and rising energy prices are simultaneously exerting pressure, further aggravating inflation stickiness.

Warsh’s rate cut expectations face reality check

Warsh will chair his first Federal Open Market Committee (FOMC) policy meeting as Fed Chair on June 16–17. He had previously publicly stated that AI-driven productivity gains should create conditions for monetary easing, suggesting the path for rate cuts could be smoother than markets expect.

However, Slok’s analysis shows that it takes time for productivity dividends to materialize, while inflation pressures are immediate. Before AI infrastructure is completed and productivity benefits begin to show, the macro environment for rate cuts is not ripe.

It is worth noting that market expectations have undergone a dramatic reversal. Before the outbreak of the US-Iran conflict on February 28 this year, markets were betting the Fed would cut rates more than twice in 2024; now, rate hike expectations are the mainstream.

Employment worries exaggerated, but monetary policy risks remain significant

Although Slok takes a cautious view of AI’s inflationary effect, he also believes concerns about AI causing mass unemployment are overstated. He says AI’s impact on the job market has been exaggerated.

Still, Slok emphasizes that the macroeconomic impact of the AI boom is far more complex and profound than single-dimension discussions—from labor markets to monetary policy, the scope of this technological wave is extremely broad. For investors, until AI productivity gains truly materialize, the combination of high inflation and high interest rates may be the baseline scenario that needs to be factored into pricing.

Risk Warning and DisclaimerThe market is risky, investment requires caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment goals, financial situation or needs. Users should consider whether any opinions, viewpoints or conclusions in this article fit their particular circumstances. Investing accordingly is at your own risk. ```