Bill Ackman Warns Fed May Have Made A ‘Mistake’, Says AI Could Break Its Inflation Model

• Ackman argued that demand for AI-fueled demand for infrastructure and energy may behave differently from the demand typically affected by higher borrowing costs.
• He added that the potential payoff from developing “super intelligence” could keep AI infrastructure spending high even as interest rates rise.
• Ackman said this could weaken a key monetary-policy channel, which is that higher borrowing costs typically curb investment and demand.

Billionaire hedge fund manager Bill Ackman questioned whether the Federal Reserve’s traditional approach to fighting inflation still works in an economy increasingly shaped by AI, energy demand and massive investment in computing infrastructure.

In a post on X, the Pershing Square Capital Management founder argued that the current AI boom could create an unusual economic environment in which higher interest rates do not necessarily reduce demand or investment as expected.

AI Could Challenge The Fed’s Inflation Playbook, Says Ackman

Ackman argued that demand for AI-fueled demand for infrastructure and energy may behave differently from the demand typically affected by higher borrowing costs.

He pointed to the potentially enormous economic payoff from winning the race to develop “super intelligence,” arguing that the return on investment could be so large that companies and governments may continue spending heavily on AI infrastructure even as interest rates rise.

Ackman added that this could weaken one of the key channels through which monetary policy is supposed to work, which is that higher rates make borrowing more expensive, which typically discourages investment and demand.

But if demand for computing power, energy and AI infrastructure remains exceptionally strong regardless of financing costs, Ackman questions whether rate hikes would have the same disinflationary effect they have had in previous economic cycles.

Earlier this month, the Bureau of Labor Statistics (BLS) data showed that the Consumer Price Index (CPI) rose 0.4% in August on a seasonally adjusted basis, with the annual inflation rate remaining unchanged at 3.4%.

Core CPI, which excludes food and energy, rose 0.3% in August, with the annual inflation rate cooling to 2.4% from 2.5% in July.

Could Higher Rates Actually Add To Inflation?

Ackman also raised concerns about another possibility, which is that higher rates could themselves become an additional source of inflation if elevated financing costs are increasingly embedded into the prices of goods and services.

“Why won’t higher rates at this unique moment in history therefore lead to more inflation as interest costs are embedded in everything?” he asked.

The billionaire investor expressed concerns that this could kickstart a vicious cycle, wherein higher rates increase costs across the economy without sufficiently reducing demand, resulting in inflation remaining elevated. The Fed could then respond with even higher rates, potentially pushing costs up further, he argued.

“What if the old models don’t apply to the current paradigm and the Fed is wrong?” Ackman asked. He concluded that the Fed “might have just made a mistake.”

Ackman’s concerns come after the Federal Open Market Committee raised the benchmark interest rate target by 25 basis points to 3.75% to 4%. Addressing reporters following the decision, Fed Chair Kevin Warsh noted that AI-related equipment and software investment has surged nearly 20% over the past year, supporting manufacturing and future growth. However, he said the timing and scale of its impact on the economy’s supply side remain uncertain.

During the after-hours session on Friday, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, rose 0.09%; the Invesco QQQ Trust ETF (QQQ) gained 0.12%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.04%. Retail sentiment on Stocktwits toward the S&P 500 ETF was in the ‘extremely bullish’ territory at the time of writing.

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