A forecast says artificial intelligence (AI) investment will also drive U.S. economic growth in the second half of this year. Since cash on hand alone cannot cover all the costs, investment funded by debt such as corporate bonds will continue, keeping bond yields under upward pressure, according to the analysis. In addition, as the AI data center construction boom sends power demand soaring, the resulting pressure on consumer prices is also expected to be considerable. As for the benchmark interest rate, the Federal Reserve (Fed), led by Chair Kevin Warsh, was assessed to have effectively ended its rate-cutting cycle. Wall Street's major banks are expected to focus on the possibility of a rate hike the Fed signaled within the year, while watching the U.S. midterm elections on November 3, Middle East war negotiations, and the continuation of AI capital investment.
Bank of Korea New York Office: "U.S. Economy in Second Half Will Also Stay Solid on AI Data Center Investment"
On the 29th (local time), the Bank of Korea's New York Office forecast at a press meeting with correspondents held at its Manhattan office that the U.S. economy will show solid growth in the second half of this year despite various variables. Regarding recent trends in U.S. economic growth, the Bank of Korea's New York Office assessed that "despite inflationary pressure and slowing consumption from tariff hikes, growth is expanding thanks to invigorated investment in AI data centers and power infrastructure, along with robust government spending." It diagnosed that employment is on an improving trend, with the increase in the number of employed widening and the unemployment rate falling slightly, while prices are accelerating their rise due to higher oil prices stemming from the Middle East conflict.
The Bank of Korea's New York Office forecast that the U.S. unemployment rate will remain stable in the low-to-mid 4% range in the second half as well. At the same time, it pointed out that prices will continue an unstable trajectory. Its view was that even if the Middle East war ends, restoring the global supply chain will take time, so high oil prices will persist for a while, continuing a pattern in which they successively push up the producer price index (PPI) and the consumer price index (CPI). Overall, it predicted that the inflation rate will likely continue to exceed the Fed's 2% target.
As for the financial markets, it noted that volatility is high due to heightened geopolitical risks and the resulting inflation concerns, as well as the possibility of fiscal deterioration. As everyone knows, the stock market fell through March due to the Middle East war, but then rebounded sharply on expectations of expanding AI investment. On this day too, on the New York stock exchange, the Dow Jones Industrial Average closed at 52,182.74, up 306.63 points (0.59%) from the previous trading day, setting a new all-time high. The Standard & Poor's (S&P) 500 (1.18%) and the Nasdaq Composite (2.07%) also rose on the rebound in tech stocks.
The Bank of Korea's New York Office saw U.S. personal consumption as delayed in its recovery due to factors such as high oil prices. Its point was that as prices rise steeply, real income falls, so the effects of the "One Big Beautiful Bill Act (OBBBA)" tax cut law introduced by President Donald Trump last July are not showing up significantly.
It saw a high possibility that the federal government's finances will deteriorate further in the second half due to tax cut policies and increased defense spending. Added to this, with a high-interest-rate environment forming, interest burdens are expanding, and along with spending on reciprocal tariff refunds following the Supreme Court ruling in February, the deficit is expected to grow.
Employment is stable but inflation is above 3%... high oil prices, fiscal deficits, rising AI infrastructure costs, higher electricity rates
The Bank of Korea's New York Office diagnosed that the U.S. economy in the second half may, above all, be decided in the AI investment sector. It said that while there are currently 4,378 data centers operating across the U.S., another 2,700, led by big tech companies, are already under construction or in the planning stage. Above all, it added that as the performance of AI models becomes increasingly advanced, the data centers themselves are rapidly heading toward becoming larger. According to the Bank of Korea's New York Office, AI-related capital expenditure (CAPEX) is contributing 39% of total U.S. economic growth.
The growing weight of AI data center construction in the U.S. economy is due to an explosive increase in computing demand from the spread of AI agents (work assistants), rising construction costs based on higher prices for semiconductors, servers, and cooling systems amid a shortage of skilled workers, and frequent replacement of AI hardware due to rapid technological evolution. In fact, according to the Bank of Korea's New York Office, even after a data center is completed, 65% of its equipment and facilities must be renovated or repaired after 10 years. With infrastructure supply unable to keep up with demand, big tech's capital expenditure forecasts for this year and next have also been revised upward by around 50% from a year ago.
The Bank of Korea's New York Office explained that there has recently been a change in how big tech companies raise funds for AI investment—an expansion of external borrowing. Hyperscalers' (ultra-large cloud operators') borrowing from January to May totaled $496 billion, already up 143.1% from last year. In this process, private credit is expected to fund about 40% of this year's capital expenditure. Of course, excessive expansion of private credit is a factor that could lead to expanded credit risk if AI demand slows or monetization is delayed.
The key factor determining whether the expansion of AI investment will continue is power supply capacity. U.S. energy and power demand stagnated for several decades but has recently been increasing sharply with the construction of AI data centers. This is because the power consumption of the high-performance chips needed for data processing and storage is increasing, and demand for cooling systems to dissipate the enormous heat generated when servers operate is also surging. The U.S. is trying to expand nuclear and renewable energy as major power sources, but the pace of building out their supply chains cannot keep up with the rising demand from AI data centers.
The increase in power demand is also leading to widening hikes in electricity rates, centered on areas dense with data centers. In addition, rising power prices are acting as a factor pressuring consumer prices upward. This is because the price of power itself directly raises the price of the energy item within the price index, and because companies that use a lot of power indirectly pass on their rising production costs to consumer prices. Higher electricity rates can lead to a decline in households' real income, also causing a contraction in consumption. This effect of reduced consumption spending is likely to be larger among low-income groups.
The Bank of Korea's New York Office said, "AI will act as a major engine driving not only the U.S. but also global economic growth for the next several years," adding that "securing the enormous power used by data center infrastructure in the process of utilizing AI is emerging as a major challenge." It added, "For the time being, a rise in power prices due to the imbalance in power supply and demand is inevitable, and consumer prices are also expected to come under upward pressure as a result."
7 in 10 Wall Street firms forecast a rate freeze within the year... Middle East negotiations, midterm elections, new tariffs are risk factors
The Bank of Korea's New York Office analyzed that the Fed's rate-cutting cycle has also effectively ended. Indeed, at the Federal Open Market Committee (FOMC) chaired for the first time by Chair Warsh on the 17th, the Fed froze the benchmark rate at the existing 3.50–3.75%, while abruptly shifting its rate path for the end of this year on the dot plot (a chart, released quarterly, that displays Fed members' rate forecasts as dots) from "one cut" to "one hike."
According to the Bank of Korea's New York Office, of the 10 major Wall Street banks, 7—including JPMorgan, Barclays, Wells Fargo, Nomura Securities, Toronto-Dominion Bank, Goldman Sachs, and Morgan Stanley—forecast that the Fed will keep rates frozen throughout this year. Bank of America (BofA) projected that the Fed will raise rates by 0.25 percentage point in the third quarter and by an additional 0.50 percentage point in the fourth quarter. Deutsche Bank expected the Fed to raise rates by 0.25 percentage point each in the third and fourth quarters, for a total of 0.50 percentage point. Only Citibank saw the Fed cutting rates by 0.50 percentage point in the fourth quarter. In effect, with the U.S. labor market solid, it judged that the risks of rising oil prices and inflation from the Middle East are greater. Earlier, at this month's FOMC, 9 of the 18 members—excluding Chair Warsh, who did not submit a year-end projection—predicted a rate hike.
Wall Street's major banks forecast that, with the addition of expanding AI demand in the second half of this year, U.S. inflation will exceed 3% and stay above the Fed's 2% price target. They judged that there is a high possibility that prices across semiconductors, power, and raw materials will rise as competition to secure equipment intensifies during the build-out of AI infrastructure. [BODY]
Regarding the Middle East situation, a memorandum of understanding (MOU) between the United States and Iran took effect on the 18th, but uncertainty remains until a final agreement is reached.
On the labor market, Wall Street expects employment gains to continue at a monthly pace of 50,000 to 100,000, with the unemployment rate holding in the low 4% range. It assessed that wage growth is gradually slowing, indicating the labor market is not overheated enough to stoke inflation.
Major banks leaned toward the view that U.S. growth would steadily exceed 2%. They argued that while the fading of the one-time tax refund effect under the OBBBA and persistently high oil prices would weigh on consumption, AI-related corporate investment could offset this. There are also expectations that the wealth effect from rising stock prices will ease weak consumption. The Bank of Korea's New York office noted, "We must watch how the market interprets and responds to the Fed's monetary policy stance, balance sheet policy, and changes in its communication methods," adding, "Risk factors include uncertainty over a delayed final agreement between the U.S. and Iran, shifts in the political landscape after the U.S. midterm elections, and doubts about the sustainability of expanding AI capital investment."
In short, with AI infrastructure investment expected to drive the U.S. economy in the second half as well, investors should watch the new tariffs based on Section 301 of trade law set to take effect next month, possible economic stimulus ahead of the November 3 midterm elections, and uncertainty over the Middle East war. One more thing to keep in mind: another surprise decision by President Trump that the market does not anticipate at all, such as the Iran war.
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