The Federal Reserve raised interest rates for the first time in over three years on Sept. 16, hiking the federal funds rate by 0.25%. The move ended a long stretch of low borrowing costs. Markets fell the day the rate hike was announced, and the central bank signaled more increases are likely to come.
Warsh’s Reason for the Hike
Warsh made the case for the move. He pointed to five years of inflation running above target, which he said was the reason for the shift.
“For more than five years, inflation has been running above target,” he said. “So our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high, and has been for too long.”
What the Rate Increase Means for Borrowers
Higher borrowing costs are already showing up across the economy. The mortgage market has felt the pressure most directly, with rates hitting multi-month highs.
The average 30-year mortgage interest rate is now close to 7%.
The AI Industry’s Dependence on Cheap Money
The AI industry has grown accustomed to cheap credit. Companies need vast amounts of computing power to train models, which means building more data centers — a very capital-intensive endeavor.
McKinsey & Co. projects $7 trillion in spending on data center infrastructure by 2030. If borrowing costs rise, the scale and pace of that spending could slow significantly.
Morgan Stanley’s Guidance on Which AI Stocks Will Win
Morgan Stanley released a report ahead of September’s rate hike, offering advice on how AI stocks will fare in a higher-rate environment. The bank’s message was clear: profitability matters more than ever.
“Higher rates and sharper scrutiny of AI investments are raising the bar for companies and rewarding discerning investors,” Morgan Stanley stresses. “In this environment, selectivity matters.”
The bank advises focusing on companies that “generate steady cash flows and have clearer ways to benefit from AI, such as select hyperscalers and companies using AI to boost productivity.” It warns investors to “stay cautious on unprofitable tech companies and smaller businesses.”
The Bottom Line on AI Stocks
The rate hike is a fact. The question is which AI companies can adapt to it.
The companies that have already proven they can generate cash flow are well-positioned. But the industry’s core problem — the capital cost of building data centers — does not disappear at the margin.
Morgan Stanley’s guidance makes sense as advice.
| Date | Event |
|---|---|
| Sept. 16 | Federal Reserve raises interest rates by 0.25% |
| Later this year | Further rate hikes expected, per Fed projections |
| 2027 | No rate changes expected, per Fed projections |
What Investors Should Follow
The coming months will test whether the winners are the companies with the clearest AI gains or the ones with the deepest pockets.
- Hyperscalers and productivity-focused firms are the recommended picks, according to Morgan Stanley.
- Unprofitable tech companies and smaller businesses are warned against.
- The $7 trillion McKinsey projection hangs over the sector regardless of rates.
Source material: “Fed Chair Kevin Warsh Raises Interest Rates for the First Time in Over 3 Years. These AI Stocks Will Benefit,” Yahoo Finance.
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