BlackRock Exec: Fed Chair Kevin Warsh Sensitive to AI

Fed Chair Kevin Warsh takes note of developments in the artificial intelligence sector, according to Jeffrey Rosenberg, a managing director at BlackRock. Rosenberg said that after the Fed held rates at 3.75% to 4% on Wednesday, Warsh connected tighter financial conditions to AI.

The central bank's June meeting minutes had flagged AI-driven demand as an inflation risk. Rosenberg's view is that a downturn in AI would instead be “primarily disinflationary,” a change that affects assets sensitive to interest rates such as bitcoin (BTC).

Why Do Interest Rates Now Follow the AI Trade?

Market interest rates have shifted their focus from oil to AI, according to Rosenberg.

“…the market sort of sniffing out that AI is a macro event as much as it is a micro event,” Rosenberg said.

Rosenberg noted that current spending relies on the wealth effect, whereby increasing asset values boost consumption. This, he added, makes financial conditions the primary transmission mechanism for Federal Reserve policy.

Market developments align with that assessment. Nick Colas, co-founder of DataTrek, stated that oil prices and bond yields were correlated for roughly ten years until they decoupled in the middle of September.

Jurrien Timmer of Fidelity noted that the Goldman Sachs AI basket — a collection of AI-related equities — has declined 22% since the start of June.

As that downturn intensified, the 10-year Treasury note yield ended at 4.96% on October 22. According to Treasury figures referenced by 24/7 Wall St., that marked the first finish under 5% since September 22.

According to Timmer, AI stocks and long-dated Treasuries have recently exhibited inverse movements, potentially positioning bonds as a hedge. The durability of that hedge, however, hinges on the next action by the Federal Reserve.

Can a Fed Watching AI Still Deliver Another Hike?

Rosenberg interpreted the modest steepening of the yield curve as a dovish signal. However, he refrained from declaring the Fed put — the notion that central bankers support declining markets — fully operational.

Nonetheless, two officials dissented in the 10-2 decision: Governor Lisa Cook and Cleveland Fed President Beth Hammack, both advocating for a rate increase.

Annual headline consumer inflation reached 3.7% as of September, according to the Bureau of Labor Statistics. Excluding food and energy, core prices increased 2.6%.

That inflation level keeps the possibility of a rate hike alive. Should inflation drive long-term yields upward, the bond hedge would become less effective.

Bitcoin faces risk from both AI stocks and interest rates. The leading cryptocurrency has frequently moved in tandem with technology shares. Back in June, a selloff in big tech and semiconductor stocks pushed Bitcoin near $62,000.

In the 24 hours leading up to Wednesday's decision, Bitcoin climbed 1.54% to $80,837, buoyed by a rally in technology stocks.

That correlation is not consistent; in August, Bitcoin behaved more like gold than the Nasdaq. Should the AI selloff restart, that pattern could weigh on Bitcoin before any monetary easing from the Fed materializes.

Rosenberg's perspective introduces an additional layer: a hit to AI would reduce inflation, he argues. Lower inflation could weaken the argument for additional rate increases, potentially benefiting rate-sensitive assets such as Bitcoin.

Personal Consumption Expenditures (PCE) inflation figures are due Thursday, ahead of the Federal Reserve's meeting on December 8-9. These events will indicate whether Treasury yields continue to follow AI-related trends instead of oil.