Good morning. The Federal Reserve held its benchmark interest rate steady at 3.75%–4% on Wednesday, citing the need for more economic data to guide its next move as inflation remained elevated and economic growth and business investment stayed strong.
For investors, the decision raises a broader question: Can higher interest rates restrain the AI investment boom without derailing the wider expansion?
Fed Chair Kevin Warsh said at a news conference on Wednesday that AI investment is not insulated from monetary policy. He pushed back against what he said is a narrative that higher rates would have little effect on AI investment because “the returns that investors are expecting are so different.”
He rejected the idea that expectations of unusually high returns make financing costs irrelevant.
“With respect to the new technology and this investment surge, do interest rates matter?” he said. “I believe they do, and I don’t believe that they’re somehow divorced from the rest of the economy.”
He added: “Interest rates get in the cracks. Interest rates affect directly, or indirectly, almost everything.”
Higher rates may not stop companies from investing in AI, but they can influence which projects attract financing, how much capital they receive and what returns investors demand.
Warsh pointed to widening credit spreads for some assets as evidence that investors are becoming more selective. In credit markets, that could mean a growing divide between borrowers with credible paths to cash flow and those whose projects depend on more optimistic assumptions about future demand and profitability.
That distinction matters as companies commit substantial capital to AI-related projects, including data centers and computing infrastructure. Even when the long-term opportunity remains attractive, higher financing costs can weaken project economics and make investors more sensitive to execution risks.
Warsh also cautioned against attributing the economy’s strength to technology alone.
“High-tech investment” is leading the acceleration, but spending is strengthening elsewhere, too, he said, suggesting that capital spending is broadening beyond technology.
That resilience complicates the Fed’s task. Strong growth gives policymakers room to keep rates elevated while they assess inflation, but sustained investment and demand could also make price pressures harder to contain.
For markets, the implications are mixed. Expectations of fewer future rate hikes could support Treasury prices, while persistent inflation, strong growth and large fiscal deficits could limit declines in longer-term yields.
Julius Bendikas, U.S. head of economics and dynamic asset allocation at Marsh, said the Fed’s decision to hold rates steady reinforced the case for patience.
“In our view, there is no need to rush with labor markets balanced, wage growth subdued and longer-term inflation expectations anchored,” Bendikas told me. “We expect Treasury yields to have room to fall as expectations for future hikes moderate.”
Lower Treasury yields could ease borrowing costs even without a Fed rate cut. But Bendikas cautioned that “strong growth, elevated energy prices and ongoing large fiscal deficits create upside risks.”
Sheryl Estrada [email protected]
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