Google and Microsoft Don’t Care About Fed’s 2% Inflation Goal

As the Federal Reserve acknowledges a setback in its inflation fight, one question looms large: Why hasn’t the economy slowed the way policymakers expected?

An underrated factor here is the growing belief that artificial intelligence will transform industry and the many billions of dollars being spent in pursuit of that future. An AI investment boom that eventually leads to a surge in productivity and economic growth might be hugely beneficial for the US, but the timing couldn’t be worse for the Fed with inflation still above its 2% target. And unfortunately for policymakers, companies including Microsoft Corp., Alphabet Inc. and Amazon.com Inc. don’t seem to care at all about the level of interest rates.

The timing of key AI milestones has overlapped and interfered with the Fed’s aggressive fight to stamp out price pressures. It was the hot inflation data received in June 2022 that led the Fed to raise its benchmark rate by 0.75% at four consecutive meetings, spooking markets into fearing recession and leading companies to spend cautiously. The revenues of Nvidia Corp. — a bellwether for the AI industry, which depends on its graphics processing units — were down on a year-over-year basis in the quarter ending October 2022.

OpenAI released ChatGPT the following month, sparking the AI frenzy. It took a while for the business world to catch on, but it was clear that the hype cycle had kicked into a new gear when Nvidia’s earnings report in May 2023 included quarterly revenue guidance 50% higher than Wall Street expected, leading the stock to soar nearly 30% in a day.