Bitunix Analyst: Fed Faces New Dilemma Between Raising Rates or Suffering Economic Pain

Huo Xing Finance reports that on June 4, the core variable influencing global asset prices is no longer whether the U.S. and Iran will go to war, but rather the new wave of inflationary pressures driven jointly by war risks, tariffs, and the AI investment boom. According to the latest Federal Reserve Beige Book and statements from officials, the U.S. economy is exhibiting a classic “dual economy” phenomenon. On one hand, private employment in the U.S. added 122,000 jobs in May, with AI data center construction continuing to drive capital expenditures; Alphabet has increased its financing target to $84.75 billion, and SpaceX’s valuation is nearing $1.8 trillion—indicating that corporate investment and tech-related capital spending remain robust. On the other hand, consumer confidence has fallen to historic lows, real wages have begun to decline, consumption among middle- and low-income households has noticeably weakened, and companies are beginning to delay certain investment plans. What truly merits market attention is the changing structure of inflation. Currently, U.S. core inflation has risen to 3.8%, above the Fed’s 2% target. The sources of this inflation cycle differ from those in 2022. Previously driven primarily by supply chain bottlenecks and fiscal stimulus, today’s inflation is being propelled by three concurrent forces: First, energy inflation. Iran has approved the formation of a Hormuz Strait working group. Although U.S.-Iran negotiations continue, discussions have expanded beyond nuclear issues to include lifting sanctions, restoring oil exports, unfreezing overseas assets, and managing Hormuz Strait governance. Even if a final agreement is reached, Middle Eastern countries have already begun constructing large-scale alternative transportation systems bypassing the Hormuz Strait—indicating that markets are already pricing in a “long-term geopolitical risk premium.” Second, tariff inflation. The U.S. has proposed imposing additional tariffs of 10% to 12.5% on 60 economies, including major supply chain nations such as China, Japan, India, South Korea, and the EU. Although the White House attempts to frame this as a trade protection measure, historical experience shows that tariffs are essentially an implicit tax on importers and consumers. Costs will likely gradually flow through manufacturing, retail, and logistics systems to end-price levels. Third, AI capital expenditure inflation. Markets previously believed AI would only enhance productivity—but the capital markets are now entering another phase. Companies including Google, Microsoft, Amazon, Meta, and NVIDIA continue heavy investments in data centers and computing infrastructure, driving up demand—and prices—for electricity, chips, servers, land, and construction. The Fed’s Beige Book further notes that AI-related investment has become one of the few remaining areas of expansion. This is precisely why Ray Dalio of Bridgewater Associates issued a warning: he is not denying AI’s potential but cautions that markets are exhibiting classic bubble characteristics. Historically—whether with railroads, the internet, electric vehicles, or AI revolutions—the underlying technologies have often been real, but valuations have not always been justified. When markets shift from “investing in the future” to “validating profitability,” capital will begin distinguishing between true winners capable of generating cash flows and those merely enjoying high valuations based on narratives alone. That said, it would be premature to conclude that AI has entered its bubble’s final stage. The world’s first ETF to surpass $1 trillion in assets—VOO—has emerged, indicating that capital has not fled equities but continues flowing into large-cap companies. In other words, the market now resembles a concentration of capital among a few dominant players rather than the prelude to a broad-based bubble collapse. Therefore, for investors, the critical question is not whether AI will disappear—but whether valuations have outpaced profitability by too wide a margin. From the Fed’s perspective, its stance has shifted. New York Fed President Williams believes there is no immediate need to raise rates but sees no justification for cutting them either; Dallas Fed President Logan has directly stated that further rate hikes may be necessary later this year. For asset allocation, the most important challenge in 2026 is no longer chasing single hot trends but building inflation resilience and liquidity buffers. As markets simultaneously confront geopolitical risks, tariff restructuring, energy supply chain realignment, and AI capital cycle expansion, the risks of overconcentration in any single industry or asset class are rising. Assets capable of enduring cycles in the future will be those combining cash flow generation, pricing power, and liquidity—not merely narrative-driven assets propelled by market sentiment alone.