Yardeni Research said on Monday that the artificial intelligence (AI) construction boom, combined with elevated energy prices, tariffs and deglobalization, is pushing up commodity prices, while stronger capital demand and a smaller supply of national savings are driving the neutral real rate higher.
In an October 19 briefing, the firm noted that the U.S. economy has shifted from the post-global financial crisis era of weak growth, low inflation and ultra-low interest rates to a phase of stronger growth, persistent inflation and higher rates.
Yardeni Questions Whether Commodity Deflation Will Return
Yardeni said the AI construction boom, high energy prices, tariffs and deglobalization are pushing up commodity prices, and questioned whether commodity price deflation will return soon. Between 2010 and 2019, commodity inflation averaged just 0.2% a year, compared with 1% since 2023. The firm noted that in August of this year, both goods and services inflation exceeded 3%.
Yardeni Sees a Higher Neutral Rate
According to the report, the AI investment boom is driving spending on data centers, semiconductors, software and research and development. Since 2023, overall nominal nonresidential fixed investment has grown at an average annual rate of 8%, compared with 6% between 2010 and 2019. The firm noted that retiring baby boomers, tighter immigration policy and large federal deficits are all weighing on national savings. Yardeni said scarcer savings and stronger investment demand are pushing the neutral real rate higher. Since 2023, the 10-year U.S. Treasury yield has averaged 4.2%, while the 10-year Treasury Inflation-Protected Securities (TIPS) real yield has averaged 1.9%, up from 0.4% previously. Yardeni noted that the real Treasury yield is not a direct measure of the neutral real rate, but said its rise is consistent with a higher equilibrium real rate.
The Fed May Need Another 50 Basis Points of Hikes
Yardeni estimates the neutral federal funds rate at between 4.25% and 4.50%. That is above the Fed's current target range of 3.75% to 4%, which was set after a 25 basis point hike in September 2026. The firm believes the Fed gave too much weight to downside risks to employment when it cut rates by 75 basis points between September and December 2025, pushing rates below neutral. Another 50 basis points of hikes would bring monetary policy back to Yardeni's estimated neutral range. However, the firm believes the Fed is unlikely to need to move decisively into restrictive territory, citing productivity growth under a "Roaring 2020s" scenario that should continue to hold down unit labor costs.
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