Fed Terminal Rate Could Top 2023-24 Peak if AI Spending Boom Continues, TS Lombard Says

01:28 PM EDT, 10/27/2026 (MT Newswires) -- The Federal Reserve's terminal interest rate could surpass its 2023-24 peak, especially if the artificial intelligence investment boom continues, TS Lombard said Tuesday. The central bank's Federal Open Market Committee kicked off its monetary policy meeting Tuesday and is widely expected to leave its benchmark lending rate unchanged at 3.75% to 4% Wednesday, according to the CME FedWatch tool. The anticipated pause would follow a 25-basis-point increase in September, the Fed's first rate hike in just over three years as it sought to tame inflation. At the time, the FOMC indicated it could raise rates again later this year. The markets are debating how many times the central bank will increase interest rates in the current tightening cycle, TS Lombard Managing Director of global macro Dario Perkins said in a note Tuesday. "There are compelling reasons to think the consensus is still underestimating this tightening cycle," Perkins said. "It wouldn't surprise us if the terminal Fed funds rate were to end up being just as high as in 2023-24, if not higher, particularly if the AI (capital expenditure) boom continues." Market expectations point to the Fed rate settling at 4.50% to 4.75%, compared with the 5.25% to 5.50% peak seen in 2023-24, according to the note. Hyperscalers, such as Amazon.com (AMZN) and Alphabet's (GOOG, GOOGL) Google, are spending huge sums to expand their AI infrastructure amid growing demand for AI and cloud services. Last week, Facebook and Instagram parent Meta Platforms (META) said it expected 2026 capex between $135 billion and $145 billion, reflecting a higher bottom end versus its previous guidance of $130 billion. The Fed's policy path is ultimately expected to be shaped by labor market dynamics and the longevity of the AI boom, TS Lombard said Tuesday. "If the recent (labor market) revival continues into 2027, even the most dovish members of the FOMC will start to see the case for higher rates," Perkins said. "If monetary policy were genuinely restrictive, employment shouldn't be picking up. And if AI were really replacing jobs, labor demand shouldn't recover." Earlier this month, official data showed the US economy added 29,000 nonfarm jobs in September, representing just about a third of the 90,000 increase projected in a Bloomberg-compiled survey at the time. The increase for August was adjusted downward, while July's tally turned negative. Last month, Richmond Fed President Tom Barkin said inflationary pressures from tariffs and the Middle East conflict may persist for a while before their impact fades. The continuing AI buildout has also complicated the Fed's fight against inflation as such massive investments could overheat of the economy. "Our official forecast is that the Fed will raise rates once every quarter (in 25-basis-point installments) until something 'breaks' -- which won't happen until the AI investment splurge ends," Perkins said Tuesday. Tech giants Microsoft (MSFT) and Alphabet are scheduled to report their latest quarterly results Wednesday, while Amazon's results are due Thursday. Chipmaker Nvidia (NVDA) and iPhone maker Apple (AAPL) are slated to report next month. Price: 253.35, Change: +4.26, Percent Change: +1.71