Markets and Economy Siren songs: AI, inflation, and the Fed’s next move

In Greek mythology, Odysseus survived the Siren’s songs because he understood the danger of distraction. They promised knowledge and certainty, but their real power was urgency. Sailors turned to the rocks not because they were foolish, but because the song was hard to ignore.

Investing can feel much the same. Knowing which “songs” to listen to and which to ignore may help keep investors from the rocks. Every week brings another “Siren song” — a central bank statement, an oil price move, a geopolitical escalation, an artificial intelligence (AI) headline, or a tariff story. Each feels important. Some are, but many aren’t a reason to change course. A danger isn’t hearing the song — it’s steering towards every song without a plan.

Insight on US Federal Reserve policy debate

Last week’s US Federal Open Market Committee (FOMC) minutes mattered because they offered the first fuller glimpse of the Federal Reserve (Fed) monetary policy debate under Chair Kevin Warsh. They may also help explain why market-implied policy rates and Treasury yields have moved higher of late. Many meeting participants still expected inflation to cool as energy prices ease and one-off tariff effects fade. Many generally saw inflation as still elevated, and upside risks to price stability still important. Several noted broader price pressures, while many flagged AI-related demand as a potential source of upward pressure on technology product and electricity prices. To me, this was the most interesting part of the meeting minutes because it challenges the idea that technology is inherently and immediately disinflationary.

AI buildout pressures

Over time, AI could raise productivity, improve efficiency, and reduce costs. I think it will. But data centers need electricity. Semiconductors need capacity. Grids need upgrading. Cooling, copper, skilled labour, financing, and permitting all matter. That’s why I don’t see AI as just a technology theme. To me it’s an infrastructure cycle, and infrastructure cycles can be inflationary before they become productivity-enhancing.

The AI buildout can still support earnings expectations, capital spending, and stock market leadership in my view. The FOMC minutes noted that US stock prices rose over the intermeeting period, led by technology, with higher earnings expectations accounting for much of the gain.¹ Yet the same boom may add price pressure in areas that central banks cannot ignore.

That’s why I believe the Fed’s task remains difficult. The labor market hasn’t been weak, and doesn’t justify lower rates in my view. Inflation, however, hasn’t been benign enough for complacency either. And AI investment complicates the assumption that technological progress automatically means lower inflation in the short term.

Iran conflict issues

Another Siren song is Iran and the Strait of Hormuz. The ceasefire appears to have broken with US strikes on Iran following Iranian attacks on tankers in the Strait. This threatened higher energy prices and disrupted trade again, which could lift inflation expectations and dent risk appetite. So far, though, the market reaction looked contained rather than disorderly. Tanker traffic hasn’t halted, oil has moved a little higher,² but broader risk assets haven’t priced a full regime shift in my view. A regime shift would probably require evidence of sustained stoppage of energy flows, durable inflation repricing, or a broader tightening in financial conditions.

The lesson since March has been that supplies could flow more than many expected provided the conflict remains contained, or diplomacy can return. Equally, it may also reflect fatigue, in my view. Investors appear to have absorbed repeated shocks — war, inflation, energy disruption, trade tension, political uncertainty, and higher rates. At some point, broader risk assets could become desensitized.

UK risks and resilience

A similar tension appears in the Bank of England (BOE) July Financial Stability Report. Vulnerabilities in risky asset valuations, sovereign debt, and risky credit remain, and in some cases have grown. Leverage in stock markets has risen sharply. Yet the UK financial system remained resilient and continued to support the real economy.³

The BOE’s core indicators also show private non-financial sector credit growth rising to 6.5% in Q4-2025 from 4.1% previously.³ UK financial conditions aren’t benign, but the domestic credit channel has signalled a gradual improvement.

The BOE also highlighted AI’s macro-financial implications — stretched valuations, concentration in AI-related stocks, higher financing needs, and cyber and operational resilience risks. That doesn’t mean the AI story is wrong. To me, it means it’s large enough to influence portfolios beyond the tech sector alone.

Disciplined optimism

The broader message to me remains one of resilience, not safety. Economies and markets continued to hold up better than many expected. Higher rates have slowed activity but haven’t ended the expansion. Energy shocks appear to have been absorbed better than feared. Many companies and consumers have adjusted rather than capitulated. That supports disciplined optimism in my view, which means aiming to stay invested, but being more selective about valuation, balance sheet strength, earnings durability, and exposure to inflation-sensitive shocks.

The risk isn’t just reacting too much to headlines. It’s reacting too little to slower structural shifts. The Fed minutes point to a more inflation-prone environment than markets might prefer. AI is powerful, but not costless. Much geopolitical risk has been absorbed, not eliminated. Financial stability concerns haven’t been flashing red, but they’re not irrelevant.

Odysseus survived because he planned before he heard the song. His sailors blocked their ears. He was tied to the mast. The mast for investors is the process: valuation discipline, diversification, and risk limits. So, when “market” Sirens are singing, keep listening but stay tied to the mast.