Kevin Warsh, the new chairman of the Federal Reserve, has sent a clear signal that he will carry out sweeping reforms and is not as “dovish” as the market had expected. This is undoubtedly terrible news for large technology companies.
The new chairman, known for his terse style, has refrained from publishing his own dot plot or providing any forward guidance, while slashing the length of the FOMC statement to less than one-third of its previous size. At the same time, he has emphasized that the commitment to achieving the 2% inflation target is firm, consistent, and unequivocal. The Fed has failed to meet its inflation target for five years, and he now intends to address this. “We had thought he was a dove who would favor lowering the federal funds rate,” wrote Wall Street veteran Ed Yardeni, founder of investment advisory firm Yardeni Research, along with his team, following Warsh’s press conference. “However, he repeatedly stressed a strict, orthodox inflation policy and a firm commitment to maintaining price stability.” All of this means that interest rate hikes have become a “time bomb,” potentially dealing a heavy blow to technology giants that are currently pouring massive amounts of money into artificial intelligence (AI). Large technology companies are increasingly reliant on debt to advance their ambitious visions for widespread AI adoption. In recent years, these aggressive investments have mainly relied on internal cash flows. These firms have taken advantage of the loose monetary policy of the Fed under Powell to spend freely. However, higher capital costs under Warsh could disrupt this dynamic. According to the latest analysis from Kobeissi Letter, AI-related companies have issued approximately $140 billion in investment-grade bonds so far this year, accounting for 49% of total investment-grade bond issuance. Additionally, AI-related companies have accounted for 38% of high-yield corporate bond issuance so far this year, totaling roughly $21 billion. The most notable debt financing this year has come from Alphabet. Alphabet has become the first technology company in decades to issue century bonds. In February, the company raised a total of $31.51 billion through a global bond offering, which included bonds denominated in pounds sterling and Swiss francs in addition to U.S. dollar bonds.Researchers at Kobeissi stated: “The AI investment boom is reshaping the way capital is allocated across the entire financial system.”
Google, Amazon, Microsoft, and Meta plan to collectively allocate $725 billion for capital expenditures in 2026, a staggering 77% increase from last year’s already record-breaking $410 billion. Among them, Amazon expects capital expenditures of $200 billion, Alphabet targets $175-185 billion, Meta projects $115-135 billion, and Microsoft anticipates $190 billion in capital expenditures for the current year. The five major hyperscale data center operators plan to add approximately $2 trillion in AI-related assets to their balance sheets by 2030. These debts may carry higher interest rates, as the Fed is led by Warsh. Data shows that Meta’s total debt has climbed from approximately $36 billion in 2023 to $84 billion by the end of the first quarter this year. Goldman Sachs economists warned: “This meeting increases the risk of interest rate hikes later this year.” Of course, this also raises the risk of higher costs for these free-spending AI giants.
