Bill Ackman warns that Federal Reserve interest rate hikes could backfire, with AI-related capital expenditures likely to undermine the tightening effect.

Billionaire investor Bill Ackman says the Federal Reserve’s 25-basis-point benchmark interest rate hike to a range of 3.75% to 4.00% is likely a mistake. He argues the AI arms race is driving big tech firms to keep expanding capital expenditures; even with rising borrowing costs, companies will likely continue building data centers and purchasing computing power, undermining the traditional dampening effect of rate hikes on investment demand. Meanwhile, higher interest costs could also pass through to goods and services prices via supply chains and pricing mechanisms, adding further inflationary pressure. Ackman noted that the current AI investment boom is likely altering the transmission mechanism of traditional monetary policy. Bridgewater data shows Alphabet, Amazon, Meta and Microsoft are expected to spend at least $650 billion on AI-related investments this year. Gartner projects global AI spending will hit $2.7 trillion by 2026, a 49.5% year-over-year increase. Mark Zandi, chief economist at Moody’s Analytics, also previously said the Fed’s rate hike at this juncture is a “mistake”, warning that to push inflation back to its 2% target, the Fed may need to curb the AI investment boom or suppress other segments of the economy. U.S. inflation remains above the Fed’s 2% target, and markets are pricing in further rate hikes. CME FedWatch data indicates 30-day federal funds futures imply roughly a 64% probability of an October rate hike.