How Will Fed Address Inflation as AI Boom Persists?

Wall Street spent the week balancing two powerful forces: the artificial intelligence investment boom and renewed concern that inflation pressure is not fading fast enough.

The S&P 500 and Nasdaq, however, proved resilient heading into the long Memorial Day weekend.

New Fed Chairman Kevin Warsh takes the helm Friday with economic data that painted a mixed picture. This week, weekly jobless claims fell to 209,000, down 3,000 from the prior week’s revised level, showing the labor market remains resilient. Housing was weaker beneath the surface: April housing starts fell 2.8% to a 1.465 million annualized pace, while single-family starts dropped 9.0%. Building permits rose 5.8%, but single-family permits declined 2.6%, suggesting builders remain cautious.

The manufacturing data was more complicated. S&P Global flash U.S. manufacturing PMI rose to 55.3, the strongest reading since May 2022, but much of the strength came from inventory building tied to supply concerns. The services PMI softened to 50.9, leaving the composite PMI unchanged at 51.7. More troubling for markets, input and output prices accelerated, keeping inflation risk alive.

The Fed remained a central concern after the release of minutes from the April 28–29 FOMC meeting. Markets interpreted the minutes as more hawkish, with officials increasingly open to rate hikes if inflation proves persistent. That kept Treasury yields elevated and made investors more sensitive to every oil and inflation headline.

The 10-year Treasury yield pulled back over the past two sessions after reaching roughly 4.7% on Tuesday. Even with higher inflation expectations tied to energy, the 10-year yield remains below its 2023 peak above 5%, suggesting bond investors are concerned but not yet in full panic mode.

The move in WTI crude mirrored Treasury yields, which backed away from near $105 per barrel highs and traded back below $100. Geopolitics continue to add another layer of volatility on shifting headlines around Iran. That mattered across asset classes because higher oil feeds directly into inflation expectations, consumer stress, transport costs, and Fed policy.

Consumer stress was evident in results this week from Walmart (WMT) and Home Depot (HD), and commodity pressures sent Deere & Co (DE) shares lower.

Overall, however, the week confirmed that the AI capex cycle remains powerful, but it also showed a market wrestling with higher-for-longer inflation risk, energy volatility, and a consumer that is resilient but increasingly price-sensitive.

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