AI Giants Ignore Rising Rates, Blunting the Fed's Inflation Brake

One rule of investing is "don't fight the Fed." Playing the contrarian to the Federal Reserve's plans to stimulate or dampen the economy only ends badly. But AI giants clearly don't follow this rule. Semafor Business & Finance editor Liz Hoffman notes that as rates rise, these companies borrow more. The US Federal Reserve's main lever for tamping down inflation, at least so far, isn't working on them.

Hoffman argues that Mark Zuckerberg and Dario Amodei aren't consumers whose spending cools when borrowing gets expensive. They see themselves as great men of history, securing super intelligence for the West and ushering in an age of intergalactic abundance. They also believe customer spending on AI has only just begun, and that coming revenue can justify their investments. That kind of existential drive can't be discouraged by an extra 75 basis points of bond interest.

This poses a problem for the Federal Reserve. Chicago Fed President Austan Goolsbee told Semafor last week that inflation is "jumping out of its lane" — spreading from AI-linked sectors into unrelated parts of the US economy. If AI industry capital expenditure is not constrained by interest rates, then rate hikes will have a diminished effect on aggregate demand.

Hoffman also identifies a shared dilemma: both AI companies and the Fed are desperate for goodwill and credibility. If mortgages cost 15% and hyperscalers are still spending like there's no tomorrow, people are going to be very mad at both of them. Speaking at the International Monetary Fund annual meeting in Bangkok, Thailand last week, Warsh recognized that AI investment was creating a "shock" on prices, but reiterated his conviction that the technology would bring wealth and productivity in future.