WSJ's Greg Ip Says Fed Can Cool AI Boom, Warns on High-Rate Optimism

Arguments that high returns on artificial intelligence investment can insulate the sector from higher interest rates are drawing pushback. The question is not just whether companies can bear higher borrowing costs, but whether liquidity across financial markets can continue to fund investors.

Greg Ip, the Wall Street Journal's chief economics commentator, wrote in an Oct. 20 column that the Federal Reserve is fully capable of cooling both the AI boom and inflation. Even if AI companies can absorb higher interest costs, enthusiasm could fade if investors find it harder to raise money.

The column targeted optimism that AI investment will not be heavily affected by interest rates. Bill Ackman has argued that the payoff from winning the race to develop superintelligence would be so large that rates matter less. John Arnold, co-chair of Arnold Ventures, has raised the possibility that higher rates may fail to curb AI demand while only increasing corporate costs and adding to the burden on consumers.

Ip wrote that short-term rates are the benchmark for the cost of liquidity. As rate increases accumulate, funding conditions tighten across Treasuries, corporate and household lending, and ultimately the stock market. If investors that depend on leverage lose access to funding, companies may also find it harder to raise capital through initial public offerings, high-yield bonds and private credit.

Ip pointed to the 2000 dot-com bubble as a comparison. Internet companies at the time also believed that optimism over technological innovation would outweigh the impact of rising rates. But after further Fed tightening, the stock bubble burst.

Ip also distinguished the Fed's goal from any direct effort to restrain AI investment. Bringing overall inflation back to 2% does not require AI-related prices to fall to the same level, he wrote. Even so, he suggested the Fed could act if achieving its inflation target requires draining the liquidity that has been supporting AI investment.