Bitunix Analyst: The Fed Faces a New Dilemma of "No Rate Hike, No-Go, but Rate Hike, Too Painful"

June 4: The key driver of global asset prices isn’t whether a U.S.-Iran war will break out anymore—it’s the new inflationary pressure spurred by the conflict, new tariffs, and the AI investment frenzy. Per the latest Federal Reserve Beige Book and official comments, the U.S. economy is showing a classic “two-sided economy” dynamic. On one side: May’s private-sector payrolls rose by 122,000, AI data center construction remains robust, Alphabet upped its fundraising to $84.75 billion, and SpaceX’s valuation is nearing $1.8 trillion—signaling corporate and tech capital expenditure is holding steady. On the flip side: consumer confidence has plumbed historic lows, real wages are starting to shrink, low- and middle-income household spending is sharply softening, and some companies are delaying parts of their investment plans. The market’s real focus should be the shifting inflation structure. U.S. core inflation is now at 3.8%, topping the Fed’s 2% target—and this round’s drivers are very different from 2022. Back then, it was mostly tied to supply chain snags and fiscal stimulus; now, three forces are pushing prices higher at once: First: Energy inflation. Iran has set up a task force for the Strait of Hormuz. While U.S.-Iran talks are moving forward, they’re no longer limited to nuclear issues—they’ve expanded to deeper topics including sanctions relief, resuming oil exports, unfreezing overseas assets, and governance of the strait. Even if a deal is eventually struck, Middle Eastern nations are already building massive alternative transport routes to bypass the waterway, meaning the market is starting to price in a “long-term geopolitical risk premium.” Second: Tariff inflation. The latest U.S. proposal would slap 10% to 12.5% extra tariffs on 60 economies, including key supply chain hubs like China, Japan, India, South Korea, and the EU. The White House is framing this as a trade protection move, but history shows tariffs are effectively hidden taxes on importers and consumers. These costs will eventually filter through to end-product prices across manufacturing, retail, and logistics. Third: AI capex (capital expenditure) inflation. Markets once saw AI as just a productivity booster—but the capital market has entered a new phase. Top firms including Google, Microsoft, Amazon, Meta, and NVIDIA are still pouring billions into data centers and computing infrastructure, driving up costs for electricity, chips, servers, land, and construction all at once. The Fed’s Beige Book also notes AI-related spending is one of the only areas still growing. That’s why Bridgewater Associates founder Ray Dalio is sounding the alarm. He’s not dismissing AI—just saying the market is showing classic bubble signs. Looking at past tech revolutions (railroads, the internet, EVs), the technology itself is usually real, but valuations can get way out of line. Once the market shifts from “betting on the future” to “testing profitability,” capital will start to split between firms that actually generate cash flow and those relying solely on hype for high valuations. That said, it’s wrong to write off AI as on the cusp of a bubble burst. The world’s first $1 trillion ETF, VOO, has launched—and this shows capital hasn’t fled the stock market; it’s still flowing into large-cap value stocks. In other words, the market is now showing a concentration of funds in a handful of top firms, not that a full bubble pop is imminent. So for investors, the real question isn’t whether AI will fizzle out—it’s whether valuations have run way ahead of actual profitability. The Fed’s stance is also shifting: New York Fed President John Williams says an immediate rate hike isn’t needed right now, but he doesn’t see a case for cutting rates either. Dallas Fed President Kaplan, meanwhile, has openly said more rate increases could be required later this year. For asset allocation, the key priority in 2026 isn’t chasing one hot theme—it’s building inflation resilience and maintaining liquidity buffers. The market is dealing with simultaneous pressures: geopolitical tensions, tariff overhauls, energy supply chain shifts, and the AI capital cycle expansion. That makes overconcentration in any one industry or asset a growing risk. The assets that will hold up best through cycles are those with steady cash flow, pricing power, and liquidity—not hype-driven assets whose valuations depend only on market sentiment.