Bitunix Analyst: The Federal Reserve is facing a new dilemma of “having to raise rates when it’s not possible to stay put, and raising rates also hurts”

Mars Finance News, June 4, the key variables affecting global asset prices are no longer whether the US and Iran will go to war; instead, it is the next round of inflationary pressure jointly driven by the war, tariffs, and the AI investment wave.

Based on the latest published Federal Reserve Beige Book and remarks from officials, the US economy is showing a typical “two-sided economy” phenomenon. On the one hand, private employment in the US added 122,000 jobs in May. Ongoing capital expenditures are being supported by the construction of AI data centers. Alphabet has even increased its financing scale to $84.75 billion. SpaceX’s valuation is approaching $1.8 trillion, showing that corporate investment and technology capital spending remain strong. On the other hand, consumer confidence has fallen to a historic low, real wages are beginning to decline, consumption by middle- and low-income households has clearly weakened, and companies are starting to postpone some investment plans. What is truly worth the market’s attention is the change in the inflation structure.

Currently, US core inflation has risen to 3.8%, higher than the Federal Reserve’s 2% target. The source of this round of inflation is also different from 2022. In the past, it was mainly driven by supply-chain bottlenecks and fiscal stimulus. Now, it is driven by three forces acting at the same time:

First is energy inflation. Iran has approved the establishment of a Hormuz Strait working group. Although US-Iran negotiations are still progressing, the discussions are no longer limited to nuclear issues; they have extended to deeper topics such as lifting sanctions, restoring oil exports, unfreezing overseas assets, and management rights over the Hormuz Strait. Even if an agreement is ultimately reached, Middle Eastern countries have already begun large-scale construction of alternative transportation systems that bypass the Hormuz Strait, indicating that the market has started pricing in a “long-term geopolitical risk premium.”

Second is tariff inflation. A new US proposal is expected to impose an additional 10% to 12.5% tariff on 60 economies, covering major supply-chain countries including China, Japan, India, South Korea, and the European Union. Although the White House is trying to package this as trade protection measures, based on historical experience, tariffs are essentially an implicit tax burden imposed on importers and consumers. From manufacturing, to retail, to logistics systems, costs may gradually pass through to end prices.

Third is AI capital expenditure inflation. In the past, the market believed that AI would only increase productivity, but the capital markets are now entering another stage. Companies including Google, Microsoft, Amazon, Meta, NVIDIA, and others are still investing heavily and on a large scale in data centers and computing infrastructure, driving up costs for electricity, chips, servers, land, and buildings in parallel. The Federal Reserve Beige Book also points out that AI-related investment has become one of the few areas that is still expanding.

This is also why Bridgewater founder Ray Dalio issued a warning. He is not denying AI; rather, he believes that the market has begun to show typical bubble characteristics. Historically, whether it was railroads, the internet, electric vehicles, or the AI revolution, the technology was real, but the valuations were not necessarily reasonable. When the market starts to shift from “investing in the future” to “validating profit-making ability,” capital will begin to distinguish who the true winners are that can generate cash flow, and who is only achieving high valuations by relying on stories.

However, it is also not accurate to simply define that AI has reached the late stage of the bubble. The world’s first ETF with a scale exceeding 1 trillion dollars—VOO—has been launched, showing that funds have not left the stock market and are instead continuing to flow into large-cap, leading companies. In other words, the market today is more like capital is highly concentrated in a handful of top firms, rather than being on the verge of a broad bubble burst.

Therefore, for investors, what really needs attention is not whether AI will disappear, but whether valuations have already run far ahead of profit-making ability.

From the perspective of the Federal Reserve, attitudes have begun to shift. New York Fed President Williams believes there is no immediate need to raise interest rates, but he also sees no reason to cut. Dallas Fed President Logan, meanwhile, said directly that further rate hikes may be needed later this year.

For asset allocation, in 2026 the most important issue is no longer chasing a single popular theme, but building inflation-resilient capability and a sufficient liquidity safety margin. When the market is simultaneously facing geopolitical risks, tariff restructuring, reorganization of energy supply chains, and expansion of the AI capital cycle, the risk of over-concentration in a single industry or a single asset is increasing. In the future, the assets that can truly survive the cycle will be those that combine cash flow, pricing power, and liquidity—not story-driven assets that rely solely on market sentiment to push valuations higher.