The Federal Reserve’s benchmark interest rate held steady on July 29 in a 9-3 vote, as new Chairman Kevin Warsh pointed to surging AI-driven capital investment as a defining feature of the economic landscape. 

The Federal Open Market Committee (FOMC) voted to maintain the target range for the federal funds rate at 3.5% to 3.75% for the fifth consecutive time.  

Three members dissented — Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan — and voted for a 25-basis point rate hike. 

“I asked for a good family fight,” Warsh said, “and I got one.”

He added that dissent makes FOMC decisions more deliberate and thoughtful.  

AI the bright spot 

Following the decision, the chairman highlighted the strength of business investment as a key economic force driving a strong labor market. Warsh, who took office May 22, spoke at his first post-announcement news conference.  

“The most striking feature of the economy is the strong growth of business investment,” he said. “In the AI-related category of high-tech equipment and software, the most recent data shows four-quarter growth rates of nearly 20%.” 

AI-driven investment in the economy is touching nearly all sectors, Lowell Citron, chairman of the Debt Finance group at law firm Lowenstein Sandler, told FinAi News. 

“Construction, energy, software, compute hardware — all are seeing unprecedented flow of capital,” Citron said. “Even the small towns where data centers are built get rejuvenated for the few months when construction workers are building stuff.” 

For the past few years, AI has been the only economic sector logging double digit growth, Citron said, adding that investors are looking at AI buildout as laying the foundation for economic growth. 

Supply-side questions 

Warsh noted the investment wave is helping sustain manufacturing output but cautioned that its supply-side implications remain uncertain.  

“CapEx is preparing the ground for future growth,” he said. “Nonetheless, the precise timing and magnitude of effects on the supply side remain hard to predict.” 

The economy is showing “impressive resilience,” Warsh said, with job gains keeping pace with the workforce and the unemployment rate clocking little change. 

The unemployment rate was 4.2% in June, down 10 basis points from May, according to the Bureau of Labor Statistics’ July 2 release. 

The Fed’s next rate announcement is scheduled for Sept. 16. 

Register here for the FinAi Lending Summit, set for Oct. 7-8 in Las Vegas. This inaugural event will include speakers from Fifth Third, Chase and Capital One, as well as a fireside chat with Piermont Bank founder and Chief Executive Wendy Cai-Lee.