Fed faces dilemma as AI infrastructure costs clash with persistent inflation

The interest rate decisions of the United States Fed have entered a complex phase where they extend beyond simple price control to directly impact the survival of the AI industry, the next-generation growth engine of the United States. As inflationary pressures persist, analysis suggests that raising interest rates could cause the massive financing costs required for building AI infrastructure to surge, leading to increased unit costs and hindered growth across the industry.

Surging diesel prices and logistics costs, a variable for midterm elections

Economics Master Kwak Soo-jong diagnosed that the current energy price situation in the United States is increasing political and economic uncertainty. According to the analysis provided by Kwak, while the average gasoline price in the United States is around $4.29, diesel prices are approaching $7 per gallon. In particular, as the price of diesel, a key component of logistics, surges, the burden of logistics costs for truck transporters traveling across the United States is increasing.

This rise in energy prices is a direct cause of pushing up producer prices. "As diesel prices approach $7, logistics costs for transporting containers will inevitably rise, which eventually leads to an increase in producer prices," Kwak analyzed. "At a time when former President Trump is facing midterm elections, this high inflation situation could be a massive setback for the ruling party." He explained that with public sentiment being negative toward the Trump administration, rising inflation could have a decisive impact on election results.

AI infrastructure companies potentially stalled by high interest rates

The Fed's dilemma lies in balancing inflation suppression with the protection of new growth engines. Kwak predicted that the Fed is highly likely to deeply consider the negative effects on industrial aspects, particularly the AI industry, when determining interest rate policy. This is because the AI industry is currently in an "infrastructure construction stage," moving beyond Large Language Models (LLM) to building data centers and producing various types of chips, including High Bandwidth Memory (HBM).

The issue is the cost of financing. Kwak pointed out, "In a situation where the Nasdaq is as unstable as if it has contracted avian influenza, raising interest rates will make it difficult to secure the financing required for the AI industry." With capital procurement through the stock market (IPO) being uncertain, companies are forced to turn to the bond market, but the rapid rise in financing costs—evidenced by the corporate bond yields of major companies like Meta already reaching double digits—acts as a major obstacle.

To handle high interest expenses, companies will have no choice but to raise service prices. "When corporate bond yields rise and costs increase, a situation will arise where the usage fees for AI services like ChatGPT or Gemini, or subscription fees for platforms like Netflix, must be increased," Kwak warned. "A vicious cycle can occur where rising costs lead to increases in consumer prices."

The 'double hardship' of inflation and interest, a crisis for households and companies

Ultimately, the Fed's interest rate decisions are forcing both households and companies into a crossroads. Kwak explained that if interest rates are raised while inflationary pressures exist, households will face a "double hardship" of rising prices and the burden of interest. Given that household income is limited, if high inflation and high interest rates persist simultaneously, consumption capacity could shrink sharply.

The situation for companies is also difficult. If interest rates rise while production costs have already increased, securing profitability becomes extremely difficult. "When borrowing funds by issuing corporate bonds, how many companies can actually produce a return of at least 10%?" Kwak emphasized. "It is a structural crisis situation where the increase in costs due to inflation and the increase in financial costs due to rising interest rates occur simultaneously."

While the past dot-com bubble was a "speed war" involving the installation of fiber optic cables, the current AI bubble controversy differs in that it is a massive infrastructure construction process encompassing data centers and high-performance chip production. The act of the Fed raising interest rates to catch inflation may shrink investment in AI infrastructure, which is the foundation of future industry, and this is expected to be a key variable in future monetary policy.

Source: original video (YouTube)