Fed Chair Kevin Warsh’s warning to AI investors: ‘Interest rates get in the cracks’

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........

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