Federal Reserve Chairman Kevin Warsh inherits an economy bolstered by an AI investment boom but pinched by rising prices from the Iran war, a Fed survey showed on Wednesday, setting up a fight over an interest rate hike when he runs his first policy meeting in two weeks.

Most U.S. regions experienced higher inflation from late April to late May due to energy-related costs tied to the Iran war “with spillovers into shipping, packaging, groceries, and fertilizer,” according to the Beige Book, a roundup of qualitative economic data from the Fed’s 12 regional banks.

“Overall, there were reports ‌of increased credit card usage, fewer ⁠retail visits, ⁠and stronger demand for necessities,” the report found, sobering signals for an economy that has long been sustained by consumer spending.

Across sectors, the report pointed to a stagflationary combination of weakening consumer demand and rising cost pressures, an unwelcome scenario for any new Fed chair, particularly one picked by a president who has said he expects his new chief central banker to deliver an interest rate cut.

In a sign of the strain that surging gas and other prices are exerting on average families, one contact told the Kansas City Fed: “Middle-income households are squeezing more life out of every dollar before deciding to spend it.”

Navy Federal Credit Union chief economist Heather Long said the report’s findings were “the latest warning sign that inflation is quickly turning into a sticky problem…New Fed Chair Kevin Warsh has to come out at the June meeting showing his firm commitment to containing inflation.”
Some of Warsh’s colleagues are already portraying the fight against inflation as gaining urgency. “I am increasingly concerned that higher interest ⁠rates could be ‌necessary later this year,” Dallas Fed President Lorie Logan said on Wednesday, noting that inflation is stubbornly high even as AI investment continues to boom.

Interest-rate futures show traders see about a 75% chance the Fed will increase its policy rate by a quarter of percent to the 3.75%-4.00% range by the end of this year, versus ⁠about a 25% probability for no change.

The Beige Book offered fresh evidence that AI is fueling what it characterized as overall “moderate” U.S. economic growth, with nine of the Fed’s 12 regional banks citing data center construction as driving demand for investment as well as labor.

But it was also rife with examples of inflationary pressures and pullbacks in spending in other sectors.

With higher gas prices, consumers are shifting towards hybrid cars or buying fewer new cars altogether, it found. Fewer empty shipping containers are being exported as shippers hold them back due to expectations of weak domestic demand.

Higher energy costs have also increased fertilizer prices. New York apple growers anticipated a much smaller harvest later this year because fertilizer has become too expensive to use.

Manufacturing firms told the Richmond Fed that demand had weakened due to consumer caution, and one equipment producer in the plastics industry said its customers were delaying capital investments due to expected oil shortages.

In the West, tourism-related demand was solid for specific events like concerts and corporate gatherings, the San Francisco Fed said. But demand ‌at “value-oriented venues” declined as consumers cut back on driving and weekend trips.

SOME YOUNG WORKERS SEE HIRING SLOW Warsh replaced Jerome Powell as Fed chief in late May just as many central bank policymakers were starting to get more nervous about inflation, which has reaccelerated in recent months due to the U.S.-backed war with Iran. Inflation has been above the Fed’s 2% target for more than five years.

Inflation by ⁠the Fed’s targeted measure jumped to 3.8% in April from 3.5% in March, while the labor market, which looked to be faltering last year as the Fed cut rates in response, has appeared to stabilize. Economists polled by Reuters expect the unemployment rate to remain at 4.3% when May jobs data is released Friday.

Warsh has embraced the idea that artificial intelligence is a disinflationary force that potentially allows the Fed to cut rates.

On Wednesday, Logan argued that the size and timing of AI-driven productivity gains are uncertain, but the boost to demand has already arrived, adding to upward price pressure that is already too high.

Other Fed policymakers have expressed similar views.

In the Beige Book, several Fed districts reported that increased use of AI has slowed hiring for early-career workers, a potential structural change to the labor market that a rate cut would not solve.

Several districts reported that defense-related activity and rising data center demand were supporting hiring in manufacturing.

But more broadly, most regions continued to see a low-hire, low-fire environment with workers reluctant to change jobs.

Wage growth was modest to moderate, the Beige Book said.

In a hint of additional inflation pressures to come, Fed banks reported “more frequent wage adjustments and cost-of-living increases to manage increasing fuel and other household cost pressures.”

New Delhi: India is set to scrap capital gains tax on investments in government securities by foreign portfolio investors (FPIs) in an effort to shore up overseas capital inflows into the country as the Centre seeks to mitigate the effects of the Iran war on the economy, said people familiar with the matter.

The Cabinet, in a meeting chaired by Prime Minister Narendra Modi on Wednesday, approved the promulgation of an ordinance to amend the Income Tax Act to pave the way for this exemption, the people said. A notification is expected soon after the President gives her assent to the ordinance.

More measures are expected to encourage capital flows.

Foreign investors are currently subject to 12.5% long-term capital gains (LTCG) tax on listed shares and bonds held for more than 12 months. They also pay a 20% withholding tax on interest earned from government bonds. The government had ended the concessional 5% rate available to them in 2023.

Industry Demand

The government had used the ordinance route in 2019 to cut the corporate tax rate to encourage private investment.
Market participants have been urging a reduction in LTCG tax and withholding tax on interest earned on government bonds amid sustained capital flows out of India.
The latest move comes in the backdrop of foreign portfolio flows turning negative and the rupee weakening sharply against the dollar with the West Asia conflict continuing.
Regulators are expected to initiate further measures to complement the government’s efforts to make the Indian markets attractive for foreign capital, said one of the persons cited above.

In the calendar year so far, exits by FPIs add up to a net Rs 2.47 lakh crore, more than double the Rs 1.04 lakh crore they pulled out in calendar 2025. The rupee hit an all-time low of 96.965 to the dollar on May 20 but has since rebounded as the Reserve Bank of India has stepped up support and oil prices eased after renewed US-Iran peace efforts.

(With inputs from Anuradha Shukla & Jatin Takkar)

Mumbai: The Reserve Bank of India (RBI) Wednesday withdrew its treasury bill auction of 182-day and 364-day totalling ₹12,000 crore, with some dealers saying the central bank seemed unwilling to pay high yields bid by participants.

The cancellation of the auction, which effectively curtails the supply of government securities, lent support to bond prices. The yield on the benchmark 10 year government bond fell three basis points from an intraday high of 7.04% to 7.01%, and ended at 7.02% on Wednesday.

“The bids for yields on the T-bill could have been higher than the comfort level of the RBI,” said a trader from a private sector bank, explaining a possible reason for the RBI cancelling the auction.
The 91-day T-bill had an average yield of 5.54% on Wednesday, versus 5.52% last week. The 182-day t-bill and 364-day t-bills had average yields of 5.67% and 5.87% respectively last week.
Another trader said that it could also be a function of high cash balance with the government after the RBI dividend.

The RBI approved a record dividend of ₹2.86 lakh crore in late May, for the 2025-26 fiscal year.
The central bank is set to auction the 10 year 2036 paper for ₹34,000 crore on Friday, along with announcing its monetary policy decision.

Mumbai: IIFL Finance has raised $500 million by selling international dollar bonds to investors across the world in an issue which was priced on Wednesday. The 3.25 year issue was priced at 7.6% after building an order book of close to $2 billion from large institutional investors.

This is the first dollar bond issued out of India since January this year when ReNew Energy raised $600 million by issuing a five year bond. Since then though geopolitical volatilities more particularly due to the US-Israel attack on Iran has meant that the high overseas yields were beyond the expectations of Indian companies looking to raise funds from abroad.

Nirmal Jain, founder and managing director at IIFL Finance said the successful issue comes at a time of heightened volatilities, pressure on the rupee and capital outflows from India.

“It’s a positive thing at a time when there has been no issue from India for a long time. This is also the first social issue from IIFL Finance. The proceeds of this issue will be used to lend to economically weaker sections of society which includes MSMEs, gold loans and loan against property,” Jain said.
Prathamesh Sahasrabudhe, MD & Head, Capital Markets, India, Standard Chartered Bank said, “This marks the market reopening dollar bond transaction for Indian issuers since the onset of the West Asia crisis.