• BCA Research warns that the Federal Reserve is underestimating AI-driven inflation and keeping rates too low, risking a stock bubble.
  • Peter Berezin argues that AI is pushing up costs for electricity and memory chips, while rising equities fuel spending.
  • Stocks are overbought but not at bear-market levels, with risks emerging from a potential AI capex bust or surge in inequality.

BCA Research is sounding the alarm that the Federal Reserve’s monetary policy may be inflating a bubble in AI-fueled stocks. In a note to clients, strategist Peter Berezin argued that the central bank is underestimating the inflationary pressures stemming from the rapid expansion of artificial intelligence infrastructure. “The Fed is ignoring the cost side of the AI boom,” Berezin said. “Electricity demand from data centers and the need for memory chips are driving up input costs in ways that could keep inflation sticky.”

This dynamic, he contends, means the Fed’s current stance—with interest rates still relatively low by historical standards—is too accommodative. Meanwhile, the equity market’s rally in AI-related names continues to boost household wealth and spending, creating a feedback loop that risks overheating the economy. “Rising stock prices are effectively doing the Fed’s work for it by stimulating demand,” Berezin added.

The warning comes as valuations for AI-heavy equities remain stretched. While BCA does not see a repeat of the dot-com crash imminent—stocks are overbought but not at bubble extremes—the firm highlights two key downside risks: a sudden pullback in AI capital expenditure as companies reassess returns, and a sharp rise in inequality that could spark political backlash. “If AI investment decelerates, the whole house of cards could come down,” Berezin said.

Market participants are watching closely. The Nasdaq 100 is up roughly 15% this year, driven by a handful of mega-cap tech stocks that are plowing billions into AI infrastructure. Some analysts have drawn parallels to the late-1990s, when telecom and internet companies overspent on capacity, leading to a bust.

Berezin’s analysis suggests that the long-term effects of AI on inflation remain uncertain. If productivity gains eventually materialize, they could be disinflationary, potentially allowing the Fed to cut rates. But for now, the near-term pressure is upward. “We could be in a period where real rates need to rise to keep the economy in balance,” he said, adding that the Fed should be more vigilant about asset price inflation.

Reached for comment, a Fed spokesperson declined to address BCA’s analysis directly, reiterating that the central bank is data-dependent and focused on its dual mandate of price stability and maximum employment.

Correction: An earlier version of this article misstated the name of BCA’s strategist. It is Peter Berezin, not Peter M. Berezin.