Kansas City Fed President Jeffrey Schmid recently offered a key insight into the U.S. economy's current state.
His comments are firmly rooted in the latest economic data. The first quarter of 2026 saw real GDP grow at a 2.0% annualized rate. What's remarkable is where that growth came from. Nearly 70% of it, or 1.39 percentage points, was driven by business investment alone. Specifically, investment in equipment soared by 17.2%, and spending on intellectual property like software and R&D jumped 13.0%. This isn't just a minor trend; it's the primary engine of the economy right now.
So, what's fueling this investment surge? The main driver is the AI supercycle. First, tech giants, or 'hyperscalers,' are spending massively. Meta, for example, raised its 2026 capital expenditure forecast to a staggering $125–$145 billion. Alphabet, Amazon, and Microsoft have all echoed this sentiment, pouring money into data centers and AI infrastructure to meet soaring demand. Second, this isn't just talk. Upstream suppliers like the semiconductor foundry TSMC are raising their revenue outlooks and boosting their own spending to build the chips these tech giants need.
However, this strong investment is happening in a challenging environment. This brings us to the other half of Schmid's message: inflation remains the top risk. Recent data shows inflation heating up again, with both consumer (CPI) and producer (PPI) prices rising faster than expected. This is why the Federal Reserve, in its late April meeting, held interest rates steady and maintained a cautious, or 'hawkish,' tone. They are trying to cool down the economy to control prices, even as one part of it is booming.
In essence, the U.S. economy is navigating a fascinating divergence. A powerful, AI-driven investment boom is providing a strong foundation for growth, a fact the Fed clearly acknowledges. At the same time, persistent inflation forces the Fed to keep monetary policy tight. Schmid’s statement perfectly captures this tension: celebrating the strength of innovation while staying vigilant on the fight against inflation.
- Glossary
- Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.
- Hawkish: A term used to describe a monetary policy stance that favors higher interest rates to control inflation.
- FOMC (Federal Open Market Committee): The branch of the Federal Reserve System that determines the direction of monetary policy.