The Fed has 99 problems—and AI is one

As if the Fed didn’t have enough on its plate already with a slowing labor market, attacks from the White House, and mixed signals on inflation, AI spending has become the newest thorn in its side.

Fed governor Christopher Waller, one of President Trump’s top picks to replace Fed chair Jerome Powell, said at the Yale CEO Summit last week that there’s so much capital being spent on AI that it could be skewing the Fed’s view of how the economy is holding up.

Thank goodness for AI

Waller’s core concern is that all the AI spending could be masking a spending slowdown elsewhere.

Tech titans have poured approximately $500 billion into building data centers and fine-tuning AI chatbots this year, according to Goldman Sachs, helping prop up the economy and the stock market alike. But take away all that spending, and you’re left with a much different picture.

He might be on to something. Barron’s noted that spending on AI categories—software, data centers, R&D, etc—accounted for 14% of Q3 GDP, and 37% of real GDP growth through the first nine months of 2025. GDP has climbed 2.1% through the first three quarters of the year, but without all that AI spending, it would have only risen 1.5%.

Wall Street’s waking up to the problem as well. In a note published this morning, Pantheon Macroeconomics analyst Oliver Allen pointed to the GDP reading and highlighted how real private fixed investments—spending by businesses, nonprofits, and households on fixed assets—would have been negative if not for all the AI-related spending.

Deutsche Bank analysts Adrian Cox and Stefan Abrudan said much the same thing earlier this month: “[The] US would be close to recession this year if it weren’t for tech-related spending, as other spending has flatlined post-Covid.”

To bubble or not to bubble

Waller’s not worried about a bubble just yet. What he’s focused on is how banks are getting more deeply involved in financing the massive AI buildout, and have taken to making riskier loans in order to catch the wave.

Waller estimated that roughly half of AI deals being done these days are being financed by equity from investors, and the other half is being paid for by complex layers of leveraged debt. That’s all well and good for the bottom line, but if those AI projects fail and hurt the banking system, it affects the entire economy, including average Americans.

For now, the economy is looking solid while AI spending continues to climb. But if the AI boom goes bust, everyone is going to feel the pain.—LB