The Federal Reserve released its semi-annual monetary policy report on Friday, cautioning that inflation increased further this spring while reiterating its commitment to price stability and clearly stating it will use all available tools to achieve its dual mandate goals.
The report submitted to Congress indicates that persistent tariff effects, energy price increases driven by Middle East conflicts, and surging demand from artificial intelligence infrastructure development have collectively heightened inflationary pressures.
The report notes that the Fed's preferred Personal Consumption Expenditures (PCE) price index remained at about twice the 2% target as of May this year.
This is also the first monetary policy report released since the new Fed Chair, Warsh, took office. Warsh is scheduled to testify before House and Senate committees next Tuesday and Wednesday, respectively, for the mid-year routine review of monetary policy.
Spring Sees Renewed Inflationary Heat with Multiple Contributing Factors
The report explicitly states that U.S. inflation "moved higher again this spring" and remains "elevated relative to the FOMC’s 2 percent longer-run objective."
The report attributes current inflationary pressures to three main factors: the ongoing effects of tariffs, higher energy prices due to Middle East conflicts, and demand expansion fueled by the AI construction boom. The report characterizes some of the elevated inflation as reflecting supply shocks.
Notably, the report also points out that some inflation measures, including the trimmed-mean PCE price index which Chair Warsh has frequently cited, have moderated over the past year, indicating divergence within inflation trends.
AI Infrastructure Development Listed as an Inflationary Factor
The report's commentary on artificial intelligence drew attention. It states that AI-related data center investment has contributed to strong growth in factory output, with U.S. productive capacity expanding at a "solid pace" and labor productivity growth remaining robust.
However, the report simultaneously lists AI infrastructure build-out as a factor pushing inflation higher, citing sustained strong demand for electricity, semiconductors, and other materials related to AI development, which has created recent price pressures.
This statement aligns with Chair Warsh's own recent positions. While Warsh has long viewed AI as a potential force for lowering inflation, he has recently acknowledged uncertainty about the timing of when AI-driven productivity gains and supply-side benefits will materialize.
Labor Market Broadly Stable but Supply Growth Slowing
On employment, the report offers a relatively moderate assessment. It indicates the labor market "has come into better balance," with the June unemployment rate at 4.2%, still considered "low."
Nevertheless, the report highlights that labor supply growth is slowing. Significantly reduced immigration and an aging population leading to a declining labor force participation rate are cited as two key structural factors restraining supply growth.
Reaffirmation of Price Stability Commitment
Regarding policy stance, the report clearly reaffirms the Federal Reserve's commitment to price stability, stating it is "prepared to use its full range of tools" to achieve the dual mandate of maximum employment and price stability, particularly when the federal funds rate is constrained by the effective lower bound.
The Fed has held interest rates steady since last December. Against the backdrop of elevated inflation, investors widely expect the Fed to begin raising rates within the year.
On the global economic front, the report notes that foreign economic activity growth was subdued in the first half of 2026, weighed down by headwinds from Middle East conflicts and U.S. tariffs, though demand from AI investment partially offset these effects.
Despite high uncertainty stemming from the Iran conflict, the report still assesses that U.S. economic activity is expanding at a "solid pace."
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