Fed Pauses Rate Hikes but Divisions Widen, AI Investment and Energy Inflation Test Policy Space

On October 29, the Federal Reserve maintained the federal funds rate at 3.75% to 4% with a vote of 10 to 2, although two officials advocated for a 25 basis point increase, indicating that inflation risks have deepened policy divisions. The Fed noted that U.S. economic activity remains strong, domestic spending is resilient, and inflation continues to be elevated; therefore, a pause does not mean the tightening cycle has ended, as future actions will depend on changes in prices and financial conditions.

The core of this policy discussion is whether AI investment can withstand high interest rates. While large tech companies have ample cash, data center operators and infrastructure suppliers still rely on external financing, and rising borrowing costs may gradually compress capital expenditures. If AI investments are sensitive to interest rates, limited tightening could amplify cooling effects; if investment remains robust, the Fed may be forced to suppress the housing market, consumption, and business demand, incurring a higher cost to growth. High energy prices further increase inflation stickiness, complicating policy judgments.

The European Central Bank also faces a tug-of-war between inflation and growth, with the market expecting the deposit rate to remain at 2.5%, but still watching for another rate hike in December. As energy costs push up price risks, growth momentum in the Eurozone is slowing, with rising yields on French government bonds and risk premiums likely tightening the economy through financing costs. If pressure in the bond market persists, even if the central bank maintains an anti-inflation stance, it will need to assess the impact of financial divergence on growth.

For the market, the key is no longer just whether the central bank raises rates this time, but whether high rates can effectively suppress demand and whether they will unexpectedly crush investment and credit. If energy inflation continues and AI financing costs rise simultaneously, global financial conditions may tighten further; if growth cools before inflation, policymakers will face the risk of excessive tightening. Future inflation data, corporate financing conditions, and the yield spread between U.S. and European bond markets will be important clues for assessing the policy path.