Bull markets rarely end because of one speech. But they can start to wobble when the cost of money changes. The four-year rally has leaned heavily on the AI investment boom, and that boom is increasingly paid for with fresh debt, just as a surge in bond yields has investors worried. Until recently, investors have mostly shrugged off that risk.
Those nerves have already shown up on the screen. On October 16, the S&P 500 technology sector dropped more than 3% as concerns about AI financing costs and heavy debt loads at data center operators rippled through the market.
Now, a short phrase from the Fed chair is adding to the unease.
What Warsh meant by a “dose of accommodation”
The Federal Reserve raised its benchmark rate by a quarter point on September 16, lifting the range to 3.75% to 4%. It was the central bank’s first hike since 2023, and the vote was unanimous, according to the Fed. The decision marked a sharp turn from earlier in the year, when officials had been debating whether conditions warranted a move at all.
At his press conference, Warsh said the Fed had removed a “dose of accommodation.” He used that phrase three times while speaking with reporters, as reported by The Motley Fool.
The wording suggests he and his colleagues do not see current policy as tight, which leaves room to pull back more support if inflation stays stubborn. In plain terms, the Fed is easing off the accelerator and applying more pressure to the brakes.
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Warsh did not soften the message. He said inflation was simply too high and pointed to too many price categories rising faster than 3%.
The Fed’s projections showed a strong majority of policymakers expecting at least one more hike before the end of the year above the newly announced range.
The minutes released on October 7 backed up that hawkish tone. Every participant supported the September hike, and most officials said another increase would likely be appropriate by year-end. Fed staff also projected that inflation will remain above the 2% goal until 2029.
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Inflation data gives the Fed little room
The latest numbers have done little to ease those worries. Consumer prices rose 3.7% from a year earlier in September, up from 3.4% in August. Energy and gasoline led the way, with the Iran conflict still pushing costs higher across airfares and other services.
Wholesale prices sent an even louder signal. The producer price index jumped 6.3% from a year earlier in September, the biggest annual gain since 2022, according to the Bureau of Labor Statistics. Price pressure at the producer level often works its way to consumers over the following months. That is a pace the Fed cannot easily ignore.
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Fed Governor Christopher Waller has named the forces keeping inflation elevated. He pointed to energy costs tied to the Iran war, AI-driven price increases in tech goods, and looming tariffs. His biggest worry is that higher inflation expectations become entrenched, according to TheStreet.
The AI effect is no longer a footnote. Bank of America noted that September’s price gains spread across both goods and services, making them harder to dismiss as a one-off.
Why higher rates threaten the AI trade
Warsh has already linked AI spending to the bond market. He said hyperscalers borrowing heavily to fund data centers partly explain rising Treasury yields, adding that the competition for capital is real. Morgan Stanley estimates AI-related global debt issuance will approach $570 billion this year, as reported by TheStreet.
That borrowing has been building for months. Hyperscalers and related companies such as Nvidia had issued about $225 billion in bonds by the middle of the year, Fortune reported. Hidden obligations such as long-term data center leases add even more to the tally.
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Higher rates make every dollar of that debt more expensive. After the hot inflation report on Oct. 14, the 10-year Treasury yield climbed to about 5.28% as traders priced in the chance of another Fed hike. Technology was the worst-performing sector that day. Growth stocks that depend on cheap financing tend to feel that pressure first.
Wall Street is starting to adjust. Goldman Sachs strategists said investor positioning is turning increasingly defensive, while JPMorgan strategists argued that stabilizing bond yields could do a lot to support stocks. In other words, the path of rates may decide how long the AI rally can run.
All eyes on the Fed’s late October meeting
Warsh kept his cards close at the IMF and World Bank meetings in Bangkok on Oct. 16. He said he does not prejudge meetings and that the economy had broadly matched the Fed’s expectations since September. He also called AI a massive investment surge but warned the transition is likely to be very bumpy, according to the Wall Street Journal. The comments came just before the Fed’s quiet period ahead of its next meeting.
Markets are split on timing. Odds of a hike at the October 27-28 meeting jumped to about 50% after the September inflation report, then slipped back to 28% by Oct. 15. Waller, New York Fed President John Williams and Vice Chair Philip Jefferson have signaled the Fed could wait.
Bank of America still expects an October hike, while Citi, UBS and Morgan Stanley economists see the next move in December. J.P. Morgan Wealth Management does not see this as the start of an aggressive tightening cycle. Whatever the timing, Warsh’s three words suggest the rate-hiking cycle is far from finished.
Related: Economist warns Fed, Warsh on track for big surprise
