US Federal Reserve: AI-related investments drive strong output growth, uncertainty over the Iran war remains a major risk.

The Federal Reserve’s semi-annual report shows that U.S. economic activity is projected to maintain steady overall expansion in 2026, driven primarily by high-tech investment and government spending. Factory output has grown strongly on the back of AI-related data center investments, with production capacity continuing to improve. However, the housing market has stalled, and external economic growth is sluggish, weighed down by Middle East conflicts and tariffs. The labor market remains broadly stable, with both wages and productivity rising, though labor supply has fallen due to slowing immigration, and small businesses and households still face tight credit conditions. Inflation remains elevated and rose further in spring, while asset prices are above historical averages. The overall financial system is stable, with banks holding sufficient reserves; the private credit market is functioning normally despite some redemption pressures. Long-term inflation expectations are largely anchored near the 2% target, but uncertainties related to a potential Iran war remain a key risk.