The U.S. Fed Can Indeed Kill the AI Boom

“Back in 2000, as the Federal Reserve raised interest rates, entrepreneurs and investors surfing the internet wave insisted it didn't matter. "Everybody knows the Fed's going to raise rates in February, but as this comes closer, VCs are throwing ever larger amounts of money at us," one told The Wall Street Journal.

 

We know what happened next. The Fed kept raising rates, and the internet-stock bubble imploded.

 

Deja vu: The same arguments are being recycled today for artificial intelligence. What if "the demand for intelligence and energy is unaffected by higher rates because winning the race for super intelligence has a near infinite ROI," hedge-fund manager Bill Ackman asked on X.

 

John Arnold, co-chair of Arnold Ventures, argued higher rates could be "counterproductive" for inflation: They won't reduce demand for AI inputs, but do "raise business operating expenses, some of which is passed along to consumers."

 

Let me set the record straight: The Fed is entirely capable of deflating the AI boom and inflation.

 

Skeptics assume interest rates could only slow AI companies by raising their cost of borrowing. That is a fallacy. Short-term rates are the benchmark cost of liquidity, affecting overall financial conditions. With each successive increase, tighter credit ripples out along the risk spectrum, from Treasurys to corporate and household loans, equity and so on. The leveraged investors who buy risky assets see their funding squeezed. Appetites for initial public offerings, high-yield bonds, private credit and securitizations dry up.

 

This is why asset meltdowns through history bear the Fed's fingerprints: the 1929 and 1987 stock-market crashes, the dot-com and housing busts, emerging-market crises in 1982 and 1997-98. As assets deflate, investment follows and sometimes recession comes next. And with recession, inflation goes down.

 

To be clear, the Fed doesn't want to end the AI boom. It only wants overall inflation to fall to 2%, which doesn't require that AI-related inflation do so as well.

 

But make no mistake: If the only way to 2% inflation is to drain the lake of liquidity sustaining AI, the Fed has the means and, very likely, the will to do it.” [1]

 

1. U.S. News: The Fed Can Indeed Kill the AI Boom. Ip, Greg.  Wall Street Journal, Eastern edition; New York, N.Y.. 21 Oct 2026: A2.