New Federal Reserve News Agency: Waller Hints "High Interest Rates Suppress AI Boom", Rate Hike Path Faces Two-way Dilemma

After the Federal Reserve's latest decision to hold rates steady and Chairman Waller's statement at the press conference not to pre-judge the December decision, Nick Timiraos, a veteran journalist from the Wall Street Journal—often dubbed the "New Fed Whisperer"—just published a new article focusing on the key signals Waller sent during his latest press conference. The core question zeroes in on an issue to which the market is highly sensitive: Can high interest rates actually dampen the current AI investment frenzy?

In his October 29 piece, Timiraos notes that, for a long time, it was widely believed that the AI industry was so flush with cash that it was immune to interest rate changes. However, Waller directly challenged this assumption by emphasizing that rising borrowing costs are indeed impacting the pace of expansion in the tech sector.

According to the article, Waller presented two seemingly opposing views at the press conference—on one hand, he sees high interest rates gradually permeating the AI investment boom; on the other, he points out that economic growth is spreading to areas beyond AI. These two seemingly contradictory judgments together form the most vexing "two-way dilemma" for the Fed's current monetary policy path.

Waller Questions "AI Immunity": Interest Rates Find Every Crack

The article says that it has long been fashionable in the market to claim that the AI boom is too large and cash-rich to care about the level of interest rates. This narrative has almost become a "consensus" in past Fed press conferences. However, Waller directly challenged this logic at the latest press event.

Timiraos quotes Waller's original text from the conference:

"There's a narrative that has circulated for quite some time, perhaps even in this very room, and it's been reflected in several press conferences—tightening monetary policy 'won’t have any impact on AI, because the expected rate of return for investors is far above the level of interest rates.' I'm skeptical of that view. Interest rates will find every crack; rates directly or indirectly affect almost everything."

Waller further pointed out that, since the last rate hike, there is evidence that investors are becoming pickier about what they invest in—borrowing costs for riskier companies have clearly jumped. This shows that the transmission mechanism of interest rates is certainly present; it merely appears with some lag in the AI sector.

The "Crack Effect" of Interest Rate Transmission: Gradual Impact from the Fringe to the Core

So, how exactly are high interest rates affecting the AI boom? Here, a critical mechanism comes into focus.

Timiraos writes that Barclay’s Chief US Economist Marc Giannoni offered a clear explanation in an interview: “To say that anything related to AI is completely insensitive to interest rates is, in my view, extremely far-fetched.” He further noted that while tech giants may not need to borrow to support their own spending, the operators and ancillary businesses building data centers for them, “the debt interest rate is a significant factor for them.”

Timiraos likens it to a tree—the trunk (tech giants) may not immediately be affected by storms, but the branches and roots (ancillary businesses and debt-backed entities) are under pressure. Former Fed senior advisor and current BNY Investments Chief Economist Vincent Reinhart gives a starker warning:

"There is a breaking point, and once it is reached, it snaps. At that point, the Fed could find the contraction in spending much greater than their models predicted."

The article says that this “gradual shock” logic provides the underlying rationale for Waller’s skepticism toward the “AI immunity” theory.

The Other Side of Growth Spillover: Does Robust Economic Performance Necessarily Mean Rising Inflation?

The article notes that Waller’s second judgment heads in the opposite direction. He suggests that it’s "convenient but inaccurate" to attribute all economic strength solely to the AI technology wave. As he put it: "To say that the economy’s strength comes entirely from this wave of new technology is convenient. But in fact, business investment is not just strong, it’s spreading out."

However, Waller also added that he does not believe robust growth will necessarily push up inflation, nor does he believe it means the Fed must hike rates further. This left the market somewhat puzzled—growth is broadening, but hikes aren’t a must? Reinhart interprets it this way: "He’s basically saying, 'We need to do more, but maybe not too much.'"

Timiraos sees this ambiguity as precisely the hardest part for markets to digest. When a central bank leader signals both “we need to do more” and “not necessarily too much,” market expectations fracture—and that very division creates volatility.

Wall Street’s Confusion: Waller’s Comments "Neither Clear Nor Convincing"

Waller’s remarks triggered distinct unease in the bond market. Timiraos reports that, during Waller’s speech, investors pared back bets on Fed hikes next year, while long-term Treasury yields edged up—a sign that worries about inflation are rising.

Several Wall Street strategists offered critical takes on Waller’s statements. TD Securities strategists said Waller “failed to clearly explain why the committee prefers to wait until December to hike rates again.” Mark Cabana, Head of US Rates Strategy at Bank of America, was more blunt, describing Waller’s answers as “neither clear nor convincing.” Cabana believes Waller seems to be using recent risk asset volatility and slight declines in market inflation expectations as a defense for keeping rates steady, but that such volatility “isn’t that dramatic.”

Such skepticism from the market reflects a deeper issue: With inflation making little progress over two years, is the Fed’s policy communication clear enough? Bond investors are searching for explicit signals that the Fed is committed to bringing inflation back to 2%. Waller’s message, clearly, didn’t fully deliver.

"The Fed Needs Two Interest Rates": Structural Trap in Policy Tools

Timiraos points out in his article that behind this debate lies a deeper policy dilemma. UBS Chief US Economist Jonathan Pingle captures the essence in a single line:

"It’s almost as if the Fed needs two interest rates—one for the AI boom and the stock market wealth effect, another for everything else."

It’s a vivid analogy. If the AI boom is insensitive to interest rates, then the Fed’s continued rate hikes to cool AI risk overdosing slower-moving sectors—housing, commercial property, small business, and lower-to-middle income consumers—that were not the main source of this round of inflation to begin with. It’s like hammering a nail with a sledgehammer, at risk of collapsing the walls around it first.

William English, former Fed economist and now at Yale School of Management, explains the lack of rate sensitivity in AI companies from another angle: "If you want to be one of the winners, that means you need to get there first." In a winner-take-all race, fear of being left behind dulls companies’ sensitivity to capital costs. This psychology greatly reduces the effectiveness of traditional monetary policy tools.

Looking Ahead: Inflation Resilience and Uncertainty About the End Point for Rate Hikes

Looking forward, Timiraos gathers forecasts from several economists on the Fed’s likely policy path, and the overall tone remains cautious.

Reinhart argues that the risks skew toward the Fed needing to do more over the short run than currently expected. His reasoning: Energy and major commodity prices seem to be stabilizing at a higher level, which will force other prices up as well. "They may find inflation more resilient than expected, and by 2027, they could run out of patience and need to tighten further." This suggests the rate hike cycle may not be over, even if the pace is slower now.

Structurally, Waller’s two-way judgment forms a framework for a “dilemma” in Fed policy:

If AI is sensitive to rates, then hikes are more effective with less collateral damage, but the risk of economic downturn is higher; if AI is not sensitive to rates, the Fed may have to cool other, more fragile sectors to achieve its goals, making the policy trade-off much higher. In either case, the Fed’s decision space is much tighter than it looks.

In summary, Timiraos’ article highlights a long-overlooked crack in current Fed policy debate—the “AI immunity” narrative in markets is now being challenged openly and internally at the Fed.

The two contradictory signals Waller sent in the same press conference highlight the Fed’s real dilemma—concerned both that the AI boom is immune to high rates (making it difficult to bring inflation down), and that such high rates could suddenly “break” at a critical point, causing unexpected economic damage. These worries point in completely opposite policy directions.

As Timiraos presents in the article, this is not an equation with a clear answer. No one knows just how sensitive the AI boom actually is to interest rates—and that answer will largely determine where the endpoint for Fed rate hikes actually lies.

For markets, Waller’s ambiguous stance may itself be a signal: the Fed itself hasn’t figured it out yet. In this uncertain environment, both the bond and tech stock markets need to brace for more volatility.