Swiss bank Bank J. Safra Sarasin fixed income strategist Alex Rohner believes the AI boom is adding pressure on the Federal Reserve. The bank forecasts two rate hikes by the Fed in the coming quarters, with risks tilted to the upside, but current forward market pricing reflects less than two hikes. Therefore, policy rate expectations still have room to rise, and the bank expects the yield curve to flatten, while long-term Treasury yields remain largely range-bound.

Rohner noted that U.S. economic growth continues to exceed expectations. Despite rising energy costs, consumer spending remains strong, supported by generous tax refund policies. Meanwhile, a new wave of investment in data centers, software, chips, and other AI infrastructure is injecting robust new demand into the market. Driven by multiple factors, overall U.S. economic activity is significantly above its estimated long-term potential, giving companies more room to raise prices and improve profit margins.

Given that AI-related capital expenditure shows no signs of slowing down, and most Taylor rule indicators point to higher interest rate levels, inflation data in the coming months will be critical. Unless inflation falls significantly, the case for a Fed rate hike in September will be quite strong.

Treasury yield volatility is also impacting the foreign exchange market. The recent rare joint intervention by the U.S. and Japan briefly strengthened the yen. Concerns that Japan may need to sell U.S. Treasuries to raise funds for foreign exchange intervention, further pushing up yields, are believed to be one reason for the U.S. government to join Japan's intervention. However, the fundamental factors driving the yen's weakness remain, and the bank believes that the earlier intervention measures are insufficient to reverse the yen's trend.