Weekly Economic Report 9.18.26
The preponderance of the evidence is that the US economy is running hot due to the AI boom. The explosion in demand for certain products has caused bottlenecks, which naturally result in substantially higher prices – and profits – for select producers. The current and expected future returns to these firms are so high that they are essentially insensitive to prices and interest rates, leading to strong borrowing, and -- as a result of the Federal Reserve defending too low an interest rate – enough money creation to support inflation well above the 2% target, rather than tight policy crowding out someone’s demand. Moreover, with the Straits of Hormuz closed, and now the East-West Pipeline challenged, energy – an essential input to the AI boom – is absorbing an inordinate part of the expansion in money supply. As with higher interest rates, the booming AI sector is insensitive, leaving the burden of rates and energy on the rest of the economy – globally.
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