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

The U.S. economy is showing a series of seemingly contradictory signals: inflation remains persistently above the Federal Reserve's target, real incomes are declining, and consumer confidence has fallen to historic lows, yet economic growth and consumer spending remain resilient; while corporate hiring is becoming cautious, investment in artificial intelligence (AI) continues to grow at a rapid pace.

According to the Zhitong Finance APP, Richmond Fed President Barkin described the current U.S. economy as an environment full of "mysteries" during a speech at the Greenville Chamber of Commerce, focusing on phenomena such as consumer resilience, corporate investment, the job market, and stubborn inflation.

Barkin is currently a voting member of the Federal Open Market Committee (FOMC).

Real incomes decline, confidence wanes, yet consumers continue to spend

Barkin pointed out that U.S. inflation is still above the Federal Reserve's target, real incomes have declined over the past year, and consumer sentiment has noticeably worsened. Since 2026, the University of Michigan's consumer confidence survey has recorded three of the lowest monthly readings in its over 70-year history.

However, in stark contrast to the pessimistic sentiment, U.S. economic activity has not shown signs of significant slowdown.

Since 2023, the average growth of U.S. real GDP has been about 2.5%, higher than estimates of the long-term trend growth of the economy. Even with high gasoline prices further squeezing household budgets this year, the U.S. economy has shown strong resilience, with healthy demand and even a slight decrease in the unemployment rate.

Barkin believes one key reason is that consumers have not stopped spending.

He stated that post-pandemic, American consumers seem to have embraced a "YOLO" (You Only Live Once) consumption mindset, willing to spend even in the face of economic uncertainty. Meanwhile, affluent households have accumulated more wealth in recent years, further supporting overall consumption capacity.

AI investment scale is "unimaginable," corporate demand is hardly affected by high interest rates

Corporate investment has also shown unexpected resilience, and Barkin believes the most obvious driving factor behind this is artificial intelligence.

"The scale of investment has become unimaginably large," Barkin said, adding that what is more noteworthy is that this round of AI investment does not seem to be significantly suppressed by high interest rates, rising construction costs, or economic uncertainty, "demand appears to show almost no signs of stopping."

Strong corporate profits provide support for substantial capital expenditures.

Barkin noted that U.S. corporate profits grew by more than 30% year-on-year in the second quarter; if large-scale cloud computing companies are included, the profit growth exceeds 50%. Meanwhile, market forecasts for corporate profits in the next quarter continue to be revised upward, and corporate leverage is also below 2020 levels.

In his view, strong profits mean that companies have both the reason and the financial capacity to continue investing in AI infrastructure, so even with higher financing costs, AI-related capital expenditures still show strong resilience.

Corporate investment is hot but hiring is cautious; AI has not triggered large-scale layoffs

However, strong capital expenditures have not translated into a hiring boom.

Barkin stated that in contrast to corporate investment, companies remain concerned about over-hiring in a highly uncertain environment, thus overall are in a "hiring freeze" state. Many companies choose to maintain stable employee numbers or gradually reduce their workforce through natural attrition The market is currently highly concerned about whether AI will cause large-scale unemployment, but Barkin believes that, from the perspective of current practical applications, most AI use cases have not yet shown a clear path to significantly reducing employee demand.

The more obvious exceptions at present are mainly concentrated in positions such as computer programmers and customer service personnel.

At the same time, another special phenomenon has emerged in the U.S. labor market: while the growth of labor demand is slowing, the growth of labor supply is also declining.

Barkin pointed out that as the net number of immigrants to the U.S. has significantly decreased, coupled with a continuously aging population, the number of people entering the labor market to seek jobs is also decreasing. Therefore, "although the number of new jobs may have decreased, the number of people looking for these jobs has also decreased."

This somewhat explains why corporate hiring has noticeably cooled, yet the U.S. unemployment rate can still remain at a relatively low level.

Inflation remains the biggest mystery: Does the Federal Reserve need to raise interest rates further?

Barkin believes that another unresolved mystery for the U.S. economy is the persistently stubborn inflation.

However, he stated that the real question is not whether inflation can ultimately return to the Federal Reserve's 2% target, but rather how inflation will return to 2%.

The core issue facing the Federal Reserve is whether inflation has entered a path that can autonomously continue to decline to 2%, or whether the Federal Reserve will ultimately still need to raise interest 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 lasts, the more likely it is that businesses and consumers' price expectations will adjust upward. Once higher inflation expectations gradually solidify, merely relying on existing economic forces may not be sufficient to bring inflation fully back to target.

He stated that if this risk is becoming a reality, then additional policy assistance may still be needed to ultimately bring inflation back to 2%.

Barkin's remarks also highlight the policy dilemma currently faced by the Federal Reserve: U.S. consumption and AI investment continue to support economic growth, the job market is cooling but not showing significant deterioration, while inflation remains above target. In this contradictory data environment, whether the Federal Reserve needs to further tighten monetary policy or wait for existing inflation pressures to dissipate on their own remains the core of future policy discussions