AI-led growth continues to draw global capital into the US: Mitul Kotecha

The U.S. Federal Reserve’s latest policy meeting has prompted investors to reassess the interest rate outlook, with bond yields rising sharply after policymakers struck a more hawkish tone than markets had anticipated. Revised inflation forecasts and the Fed’s updated “dot plot” suggested that officials remain firmly focused on bringing inflation back to target, even if that means keeping rates higher for longer.

Mitul Kotecha from Barclays said markets were caught off guard by the Fed’s stance.

“The reaction has been a hawkish one. Nine of the 18 dots showed a hike this year, inflation forecasts were revised higher, and markets are now pricing in close to two rate hikes by the end of March next year. They are clearly not expecting any easing this year.”

Inflation Still Driving Policy

Despite the Fed’s cautious stance, Kotecha believes rate cuts could still become possible next year if inflation moderates as expected.

“Inflation remains elevated, and the Fed does not believe it will come down soon. But our house view is that there could be scope for some easing towards the end of the first quarter next year if inflation moves closer to target.”Markets Need More Evidence
Kotecha said resilient economic data means investors will need stronger evidence before changing their expectations.”The labour market remains tight, and markets have rapidly shifted away from expecting cuts this year. It will take significant easing in inflation to change those expectations.”

AI Investment Supporting US Growth
He also highlighted artificial intelligence spending as a key reason the U.S. economy continues to outperform.

“AI investment has been a major driver of US growth, with substantial capital expenditure still expected. Capital continues to flow towards higher-growth technology sectors, and that remains supportive for the US economy.”

While geopolitical developments have eased some concerns over energy prices, the Fed’s latest message suggests inflation remains its primary focus. Investors are now expected to closely track inflation and labour market data to gauge whether policymakers can eventually pivot towards easing in 2027.