The resilience of the U.S. economy perplexes the Federal Reserve! Consumer spending and AI investment remain strong. Richmond Fed President: The path to returning inflation to 2% still holds uncertainty.

The U.S. economy is currently displaying a series of seemingly contradictory signals: inflation remains persistently above the Federal Reserve's target, real incomes are declining, and consumer confidence has dropped to historic lows, yet economic consumption remains resilient; while corporate hiring is becoming more cautious, investments in artificial intelligence (AI) continue to grow rapidly. During a speech at the Greenville Chamber of Commerce, Richmond Fed President Barkin described the current U.S. economic environment as filled with "mystery" and highlighted the phenomena of consumer resilience, corporate investment, the labor market, and stubborn inflation. Barkin is currently a voting member of the Federal Open Market Committee (FOMC). Real Income Declines, Confidence Dips, Yet Consumers Keep Spending Barkin pointed out that U.S. inflation is still above the Federal Reserve's target, real incomes have decreased over the past year, and consumer sentiment has notably worsened. Since 2026, the University of Michigan's consumer confidence survey has recorded three of the lowest monthly readings in its more than 70-year history. However, in stark contrast to this pessimism, U.S. economic activity has not shown significant signs of faltering. Since 2023, the average growth rate of U.S. real GDP has been around 2.5%, surpassing estimates of long-term economic trend growth. Even with high gasoline prices further squeezing household budgets this year, the U.S. economy has displayed strong resilience, with demand remaining healthy and the unemployment rate even slightly decreasing. Barkin believes one key reason for this is that consumers have not stopped spending. He stated that post-pandemic, American consumers seem to embrace a "YOLO" (You Only Live Once) mentality regarding spending, choosing to spend even amid economic uncertainty. At the same time, wealthy households have accumulated more wealth in recent years, further supporting overall consumption capacity. AI Investment Scale "Beyond Imagination" with Corporate Demand Largely Unaffected by High Interest Rates Corporate investment has similarly shown unexpected resilience, which Barkin attributes primarily to artificial intelligence. "The scale of investment has become unimaginable." Barkin noted that what is particularly noteworthy is that this wave of AI investment appears to be largely unaffected by high interest rates, rising construction costs, or economic uncertainty; "demand shows almost no signs of stopping." Strong corporate earnings have provided support for substantial capital expenditures. Barkin indicated that U.S. corporate earnings grew by more than 30% year-on-year in the second quarter; when including large-scale cloud computing companies, the growth rate exceeds 50%. Meanwhile, the market continues to raise its forecasts for corporate earnings in the next quarter, and corporate leverage is also below 2020 levels. In his view, strong earnings give companies both reasons and financial capacity to continue investing in AI infrastructure. Therefore, even with high financing costs, capital expenditures related to AI have shown strong resilience. Corporate Investment Booming but Hiring Cautious; AI Has Not Triggered Large-scale Layoffs However, the robust capital expenditures have not translated into a hiring surge. Barkin noted that in contrast to corporate investment, companies remain wary of over-hiring in a highly uncertain environment, thus overall activity is in a "hiring freeze" state. Many companies have chosen to maintain stable employee numbers or gradually reduce staff through natural attrition. The market is currently highly focused on whether AI will lead to large-scale unemployment, but Barkin believes that based on current applications, most AI use cases have not yet shown a clear path toward significantly reducing employee demand. The more obvious exceptions currently concentrate on positions such as computer programmers and customer service representatives. Meanwhile, another unique phenomenon has emerged in the U.S. labor market: as the growth of labor demand slows, the growth of labor supply is also declining. Barkin pointed out that with a significant decrease in net immigration into the U.S., combined with a continuously aging population, the number of people entering the labor market in search of jobs is also decreasing. Therefore, "although new job openings may be fewer, the number of people looking for these jobs is also diminishing." This partly explains why corporate hiring has evidently cooled, yet the U.S. unemployment rate remains relatively low. Inflation Remains the Biggest Mystery: Does the Fed Need to Raise Rates Further? Barkin believes another unresolved mystery facing the U.S. economy is the persistent stubborn inflation. However, he stated that the real question is not whether inflation will ultimately return to the Fed's 2% target, but rather how inflation will return to 2%. The core issue for the Federal Reserve is whether inflation has entered a self-sustaining decline towards 2%, or whether the Fed will ultimately need to raise rates further to complete the final phase of the anti-inflation process. Barkin warned that U.S. inflation has been "too high for too long," and the longer it persists, the more likely price expectations among businesses and consumers will adjust upward. Once high inflation expectations become entrenched, merely relying on existing economic forces may not be sufficient to bring inflation back down to the target. He noted that if this risk is becoming a reality, additional policy assistance may still be needed to ultimately bring inflation back to 2%. Barkin's comments also highlight the policy dilemmas currently faced by the Fed: U.S. consumption and AI investment continue to support economic growth, the labor market, while cooling, has not shown significant deterioration, and inflation remains above target. In such a contradictory data environment, whether the Fed needs to tighten monetary policy further or wait for existing inflation pressures to dissipate will remain a core topic for future policy discussions.