Fed Faces Policy Gridlock as AI Capex, Energy Costs and Jobs Signals Collide

The Federal Reserve faces conflicting signals ahead of its October 27–28 meeting. Initial jobless claims fell to 194,000 in the week ended October 17, near a 57-year low, while September nonfarm payrolls increased by only 29,000. The Fed raised its target federal funds range by 25 basis points in September to 3.75%–4.00%, its first increase in three years. Markets broadly expect the central bank to hold rates unchanged at the upcoming meeting. Inflation pressures remain complicated by energy, tariffs and housing. Since the end of 2019, grocery prices have risen about 30%, electricity prices 43%, and auto insurance costs nearly 50%. Since the US-Iran conflict began in February, diesel and gasoline prices have risen about 70% and 50%, respectively. AI infrastructure spending adds another policy variable. Barclays found major cloud companies' AI infrastructure spending exceeds 90% of operating cash flow, meaning much of the investment is funded internally and may be less sensitive to higher rates than debt-funded investment. The source also says US technology stocks recently saw a notable selloff as investors questioned returns on large capital expenditure, while funds moved back into Treasuries. The 10-year Treasury yield briefly fell below 5%, and the implied probability of a December rate increase dropped to about 85%.