AI investment boom combined with insufficient savings! Yardeni says neutral rate has risen to 4.25%-4.50%, and the Fed may need to raise rates by another 50 basis points.

Note that Yardeni Research said on Monday that the AI construction boom, combined with high energy prices, tariffs and deglobalization, is pushing up commodity prices; while stronger capital demand and a smaller supply of national savings are driving the neutral real rate higher. In a briefing on October 19, the firm noted that the U.S. economy has shifted from the post-global financial crisis period of weak growth, low inflation and ultra-low interest rates to a phase of stronger growth, persistent inflation and higher interest rates. Yardeni questions whether commodity deflation will return Yardeni said the AI construction boom, high energy prices, tariffs and deglobalization are pushing up commodity prices, and questioned whether commodity price deflation will return soon. Between 2010 and 2019, commodity inflation averaged only 0.2% a year, versus 1% since 2023. The firm noted that in August of this year, both goods and services inflation exceeded 3%. Yardeni believes the neutral rate is higher According to the report, the AI investment boom is driving spending on data centers, semiconductors, software and R&D. Since 2023, overall nominal nonresidential fixed investment has grown at an average annual rate of 8%, versus 6% between 2010 and 2019. The firm noted that baby boomer retirements, tighter immigration policy and large federal deficits are all weighing on national savings. Yardeni said scarcer savings and stronger investment demand are pushing the neutral real rate higher. Since 2023, the 10-year Treasury yield has averaged 4.2%, while the 10-year Treasury Inflation-Protected Securities (TIPS) real yield has averaged 1.9%, up from 0.4% previously. Yardeni noted that the real Treasury yield is not a direct measure of the neutral real rate, but said its rise is consistent with a higher equilibrium real rate. The Fed may need to raise rates by another 50 basis points Yardeni estimates the neutral federal funds rate at between 4.25% and 4.50%. That is above the Fed's current target range of 3.75% to 4%a range formed after a 25 basis point rate hike in September 2026. The firm believes that when the Fed cut rates by 75 basis points between September and December 2025, it placed too much weight on downside risks to employment, thereby pushing rates below the neutral level. Another 50 basis points of rate hikes would bring monetary policy back to Yardeni's estimated neutral range. However, the firm believes the Fed is unlikely to need to move decisively into restrictive territory, citing productivity growth under the "Roaring Twenties" scenario, which should continue to restrain unit labor costs.