The Bank of Korea's (BOK) New York office forecast that inflation and employment stability will continue in the U.S. economy in the second half of this year. As big tech companies' investment in artificial intelligence (AI) data centers drives the U.S. economic growth rate, the office assessed that the Federal Reserve's rate-cutting cycle has effectively ended.
The BOK New York office held a press briefing for correspondents at its Manhattan office Monday, forecasting that the U.S. economy will show solid growth in the second half of this year despite various factors. Jeon Kwang-myung, head of the BOK New York office, assessed the recent trends in U.S. economic growth, saying, "Despite inflationary pressures and slowing consumption from tariff increases, growth is expanding due to active investment in AI data centers and power infrastructure, along with strong government spending."
In detail, the office forecast that the U.S. labor market in the second half will see a larger increase in the number of employed people, while the unemployment rate remains stable in the low-to-mid 4 percent range. For inflation, by contrast, it projected that even if the Middle East war ends, restoring global supply chains will take time, so high inflation exceeding the Fed's 2 percent target will persist. The office expects that with high oil prices continuing for the time being, producer prices (PPI) and consumer prices (CPI) will continue to be pushed up in succession.
The BOK New York office explained that the sharp rise in power demand triggered by AI data center construction will also be a factor in inflation. This is because the increase in electricity usage rates has been expanding, centered on areas dense with data centers, already acting as a pressure factor on consumer price inflation.
For financial markets, the office noted that volatility is high due to heightened geopolitical risks and resulting inflation concerns, as well as the possibility of worsening fiscal conditions. On personal consumption, it saw recovery being delayed due to high oil prices and high inflation. It also viewed the federal government's finances as highly likely to deteriorate further in the second half due to tax cut policies and increased defense spending. In addition, it expected the deficit to grow as a high interest rate environment expands interest burdens, and as spending on reciprocal tariff refunds following the February Supreme Court ruling is added.
AI Capital Spending Drives 39% of U.S. Growth
Data Center Power Shortage Fuels Inflation
However, the BOK New York office forecast that the U.S. economy will be lifted by AI-related corporate investment in the second half as well. According to the office, AI-related capital expenditure (CAPEX) is contributing 39 percent of total U.S. economic growth. As infrastructure supply fails to keep pace with demand, big tech's capital expenditure forecasts for this year and next year have also increased by about 50 percent from a year earlier.
The BOK New York office assessed that among forms of AI investment, hyperscalers' (ultra-large cloud operators') borrowing from January to May reached $496 billion, up 143.1 percent from last year. In addition, 40 percent of this year's capital expenditure is expected to be funded by private credit. Jeon said, "AI will act as a major driving force for global economic growth, not just for the United States, over the coming years," adding, "Consumer price inflation pressure from data center infrastructure using enormous amounts of power will be unavoidable for the time being."
The BOK New York office said that Wall Street views the rate-cutting cycle for the U.S. base rate as having concluded. According to the office, among 10 major large banks on Wall Street, seven — including JPMorgan, Barclays, Wells Fargo, Nomura Securities, Toronto-Dominion Bank, Goldman Sachs, and Morgan Stanley — forecast that the Fed will keep rates frozen throughout this year. Bank of America (BofA) projected that the Fed will raise rates by 0.25 percentage point in the third quarter and an additional 0.50 percentage point in the fourth quarter. Deutsche Bank expected the Fed to raise rates by 0.25 percentage point each in the third and fourth quarters. Among the 10 large banks, only Citibank forecast that the Fed will cut rates by 0.50 percentage point in the fourth quarter.
At the Federal Open Market Committee (FOMC) meeting on the 17th, the first chaired by Chairman Kevin Warsh, the Fed kept the base rate frozen at the existing 3.50–3.75 percent and sharply shifted its year-end rate path on the dot plot — a quarterly chart showing Fed members' rate forecasts as dots — from "one cut" to "one hike." Jeon noted, "We must pay attention to the market's interpretation of and response to the Fed's monetary policy stance, balance sheet policy, and changes in its communication methods," adding, "Risk factors include uncertainty over delays in final negotiations between the United States and Iran, changes in the political landscape after the U.S. midterm elections, and doubts about the sustainability of continued expansion in AI facility investment."
