Fed Chairman Kevin Warsh Just Threw a Dagger at AI-Driven Wall Street Rally With 6 Direct Words

For most of the last four years, the Dow Jones Industrial Average (^DJI -0.38%), S&P500 (^GSPC +0.36%)And Nasdaq Composite (^IXIC +0.83%) are virtually unstoppable, thanks in large part to the evolution of artificial intelligence (AI).

Equipping software and systems with the tools to make split-second autonomous decisions promises to increase the productivity and efficiency of most sectors and industries, and is widely seen as an investment opportunity not to be missed. But AI’s actions are not foolproof, at least according to Fed Chairman Kevin Warsh.

Fed Chairman Kevin Warsh just spoke to investors about AI-related stocks. Image source: Official Federal Reserve photo.

On October 28, Warsh and his colleagues on the Federal Open Market Committee (FOMC) voted to keep interest rates steady amid annualized inflation for the 67th consecutive month above the Fed’s long-term target of 2%. Although the FOMC’s decision often makes headlines, it is Fed Chairman Warsh’s comments to the press following the October FOMC meeting that really shake things up.

In just six direct words, the head of the Federal Reserve sent a stab into the stock market’s No. 1 catalyst.

AI Stocks Not Immune to Rising Interest Rates

After each FOMC rate decision meeting, the Fed’s sitting chair delivers prepared remarks and then takes a handful of questions from the press.

Since taking the helm of the Fed on May 22, Warsh has removed forward guidance from FOMC meeting statements and in his post-meeting discussions with reporters. In other words, getting direct answers or clues about what’s to come has been a challenge during Warsh’s five-month tenure.

But in one of his most candid moments since taking over from Jerome Powell, Fed Chairman Warsh opened up about the interest rate sensitivity of AI companies:

Interest rates come into play, interest rates directly or indirectly affect almost everything… You have seen market participants distinguish between the types of investments they want to make. You have seen the credit spreads of certain assets widen, widen. For others, there has been some tightening of financial conditions, but not significantly.

It’s this blunt six-word assessment, “interest rates are falling through the cracks,” that sends an unequivocal message to AI stock investors.

While some Wall Street hyperscalers finance the construction of their data centers through stock issuance and available cash, the supernatural demand for AI hardware is financed, in part, by debt. If borrowing costs continue to rise, they could harm this expansion and near-term growth projections, forcing a revaluation of the second most expensive stock market in history.

Image source: Getty Images.

AI Stocks Could Face Interest Rate Pressure on Two Fronts

What makes the current interest rate climate particularly tricky for AI stocks is that they could be hammered on two fronts.

The most obvious is that Warsh and the FOMC are expected to raise interest rates several times, starting in December. THE CME GroupIt is (DUDE -0.71%) FedWatch Tool predicts a 72% chance of a 25 basis point rate hike in December and a nearly 50% chance of a cumulative 75 basis point hike by September 15, 2027.

The last time U.S. Treasury yields were this high, the total U.S. national debt was just $8.9 trillion. Today, the US debt stands at $40.1 trillion. This represents +31.2 trillion dollars more, or more than 4.5 times more. This means that each percentage point of the average cost of servicing the debt now translates into approximately $401 billion per year in interest costs. In 2007, that same percentage point translated to only about $89 billion. That’s about $312 BILLION extra in annual interest costs for every percentage point increase in the cost of borrowing. The situation is very different from 19 years ago. The bond market matters more than ever.

– Kobeissi Letter (@KobeissiLetter) September 25, 2026

But the bond market could also penalize AI stocks. Particularly higher yields on long-term Treasury bonds (particularly 10- and 30-year yields) can increase corporate borrowing costs. While high inflation is one reason long-term Treasury yields have surged in 2026, it’s not the only one. For example, bond traders are also concerned about total U.S. debt exceeding $40 trillion and persistent federal deficits.

This combination of forces pushing up borrowing rates poses a potential disaster for AI stocks.