AI Boom May Squeeze Mortgage Rates, Says Fed's Kashkari

AI Investment May Limit Mortgage Rate Relief

American consumers anticipating lower mortgage rates may face disappointment, despite expected rate cuts by the Federal Reserve. Minneapolis Fed President Neel Kashkari recently highlighted a key factor: the massive influx of capital into artificial intelligence (AI) is redirecting funds away from traditional investments like housing, potentially squeezing mortgage rates.

Speaking at the Minnesota Star Tribune’s North Star Summit, Kashkari shared insights on how the booming AI sector is reshaping economic dynamics. He noted that even with Fed rate cuts, mortgage rates might not drop significantly due to the attractiveness of AI data centers compared to housing investments.

The AI Investment Surge

The rapid growth of AI has sparked an unprecedented investment surge. Tech giants and venture capitalists are pouring billions into AI research, development, and infrastructure. This shift is creating a ripple effect across the economy, as funds that might have gone into housing or other sectors are now being channeled into AI.

"The returns on AI data centers are currently more attractive than housing," Kashkari explained. "This means less capital is available for mortgage lending, which could keep rates higher than expected despite Fed policy changes."

Federal Reserve Rate Cuts

The Federal Reserve controls the federal funds rate, which influences but does not directly set consumer rates like mortgages. Historically, mortgage rates have sometimes dipped in anticipation of Fed rate cuts, but the impact has been inconsistent. Kashkari emphasized that the current economic environment, shaped by AI investment, may further limit the impact of rate cuts on mortgage rates.

"Rate cuts are just one piece of the puzzle," he said. "Other factors, like investment trends and market dynamics, play a significant role in determining mortgage rates."

Inflation and Economic Stability

The Fed’s dual mandate of price stability and low unemployment guides its interest rate decisions. High inflation typically prompts rate increases to cool the economy. However, the current AI boom adds complexity, as the sector’s growth could influence both inflation and economic stability.

"Driving the economy too fast can lead to price increases," Kashkari cautioned. "The Federal Open Market Committee prioritizes data-driven decisions to balance growth and stability."

Political Pressure vs. Fed Independence

Former President Donald Trump previously pressured the Fed for rate cuts, falsely claiming that inflation was low. Kashkari emphasized the importance of the Fed’s independence, stating that decisions must be based on data, not politics.

"The Fed’s independence is crucial," he said. "We must remain focused on the data and the long-term health of the economy, regardless of external pressures."

Impact on Consumers

For consumers, the AI-driven shift in investment could mean higher mortgage rates, even as the Fed adjusts its policies. While the full extent of the impact remains uncertain, Kashkari’s comments underscore the need for consumers to stay informed about broader economic trends that influence mortgage rates.

"Consumers should be aware of the broader economic context," he advised. "Factors like AI investment can have significant, if indirect, effects on their financial decisions."