Complaints about the construction of massive new data centers around the country and their effects on noise, air pollution, water sources, energy consumption, traffic and especially the disruption of peaceful ways of life are increasingly common. Now Fed chairman Jerome Powell has drawn attention to another risk the sector could cause: inflation.
Speaking at a press conference following the Fed's most recent meeting, Powell stated that supplying the goods and services needed to build these data centers is leading to constraints on overall supply – and putting pressure on inflation at the margin. In addition, it might raise the neutral rate in the near term.
"You're not looking at something that would immediately call for lower rates or that would lower inflation. Over time, though, sure, it can be. If it's expanding potential output, which is what higher productivity does, then it actually can be."
Powell stressed, however, that it's too early to know whether such demand is growing faster or slower. He said it was an empirical question and only time would tell.
Powell predicted that real GDP will rise 2.4% this year and 3.29% next year. The unemployment rate in February stood at 4.4% but is expected to ease over the year, while job gains have remained low. The labor force declined due to lower immigration and lower labor demand.
Inflation remained elevated above the Fed's 2% goal. Powell noted that inflation expectations have risen in recent weeks, largely due to the substantial rise in oil prices driven by events in the Middle East, but said the impacts of those developments remain uncertain.
Inflation this year is projected at 2.7%, and next year at 2.2% -- higher than expectations in December. Total core inflation is around 3% and some big chunk of that, between a half and three-quarters, is actually tariffs, Powell stated.
He added that the Fed is committed to maintaining a target Fed funds rate of 3.5% -3.75%. He said this should help stabilize the labor market while allowing inflation to continue moving toward the Fed's 2% goal. He cautioned that higher energy prices could push up overall inflation but said it was too soon to know their overall impact on the economy. He made the same comment about the effects of tariffs.
"Available indicators suggest that economic activity has been expanding at a solid pace," Powell stated. "Consumer spending has been resilient, and business fixed investment has continued to expand. In contrast, activity in the housing sector has remained weak."
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