Kevin Warsh: AI Investment Boom Driving Up Your Borrowing Costs as Hyperscalers Compete for Capital

Kevin Warsh Identifies AI Investment as Key Driver of Rising Borrowing Costs

Federal Reserve Chair Kevin Warsh highlighted AI investment as a significant factor behind rising borrowing costs during a press conference following the Fed's decision to raise its benchmark rate by a quarter percentage point to 3.75-4% on September 16, 20261

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. When asked about the surge in 10-year Treasury yields, which crossed 5% on September 14 for the first time since 2023, Warsh pointed to three primary causes: economic strength, geopolitical risks, and the unprecedented borrowing by AI's hyperscalers2

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. "The so-called hyperscalers are out in the market raising funding," Warsh explained. "And so the competition for capital is real. And I think it partly explains the increase in yields."2

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Hyperscalers Borrow Hundreds of Billions for Data Centers

The scale of AI infrastructure spending has reached extraordinary levels. The five major hyperscalers—Amazon, Microsoft, Alphabet, Meta, and Oracle—issued $121 billion in U.S. corporate bonds in 2025, a dramatic increase from an average of $28 billion annually between 2020 and 2024, according to BofA Securities2

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. Morgan Stanley estimates that AI-related global debt reached nearly $236 billion by the end of May 2026, four times the pace of a year earlier, and forecasts it will approach $570 billion for the full year2

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. This massive borrowing spree reflects a fundamental shift: hyperscaler capital spending now runs close to 100% of operating cash flow, with some companies dipping negative, meaning they can no longer fund data centers and AI infrastructure buildout from profits alone and must turn to bond markets2

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Competition for Capital Pushes Up 10-Year Treasury Yields

Warsh described the 10-year Treasury as "the most important asset anywhere in the world" and "the risk-free asset upon which every price of virtually every asset in the world is related to"2

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. The argument is straightforward: there is only so much money to lend at any given time, and when tech giants borrow hundreds of billions for data centers, they compete with the U.S. Treasury and everyone else for that capital, driving up the price of borrowing across the economy2

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. This competition for capital affects everything from mortgages to auto loans to credit cards, making borrowing more expensive for consumers and businesses alike1

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Federal Reserve Rate Hike Exposes Two-Speed U.S. Economy

The Federal Reserve's decision to raise rates also highlighted an increasingly confounding dilemma: it can raise the price of money across the economy, but it can't determine which sectors are most affected1

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. The rate increase may further slow weaker parts of the economy, such as the housing market, while barely affecting the strongest sector—the relentless AI investment boom1

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. This two-speed U.S. economy sees investment in AI, whether through data centers, computing capacity, or related infrastructure, booming and crowding out other kinds of investment1

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Housing Market Crushed While AI Infrastructure Thrives

The housing market provides the clearest example of the uneven economic impact. Persistently high mortgage rates are reinforcing the "lock-in" effect for current homeowners who financed their houses when mortgage rates were 3% or 4%, so they're staying put with little incentive to sell and purchase another home at much higher rates1

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. Meanwhile, consumers are carrying ever more expensive credit card and auto debt, and many small and traditional businesses face substantially higher financing costs than they did several years ago1

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. Those costs reflect rising US bond yields on longer-term U.S. government debt, driven by a mix of factors including longer-term inflation concerns due to soaring U.S. government debt, geopolitical risks pushing up energy costs, and ongoing financing demand for AI1

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Warsh Defends Inflation Target Amid Economic Strength

In its statement, the Fed's policymaking committee described inflation as still "elevated" and noted that other economic indicators remain strong, from productivity to investment to domestic spending1

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. The decision aligns with Kevin Warsh's recent comments that restoring price stability is central to the Fed's credibility. In a key speech in August at the Federal Reserve Bank of Kansas City's annual Jackson Hole conference, he underscored his commitment to bringing annualized inflation back down to 2%, an objective he called a "firm, fixed target"1

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. Consumer prices rose 0.4% in August and 3.4% over the past year, showing the 2% annual inflation target remains elusive1

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Geopolitical Risks Add Pressure on Borrowing Costs

Warsh also pointed to geopolitical risks as another factor behind higher long-term yields. The war with Iran has pushed oil prices back above $100 a barrel, adding new inflation pressure through gasoline, diesel, transportation, and production costs1

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. According to Reuters, Warsh said markets were responding not only to movements in commodity prices but also to the broader costs of turning raw materials into products that reach consumers3

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. Notably, Warsh did not identify concerns about the sustainability of U.S. government deficits as a major driver of higher yields, even as federal debt has surpassed $40 trillion3

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What to Watch: AI's Long-Term Impact on Monetary Policy

Warsh emphasized that financial markets inform policymakers but do not dictate decisions, stating that market pricing did not force the Fed into raising rates3

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. He also revealed that the Fed has set up an internal task force on AI, due to report by the end of the year, to study "the implications for our future policy conjuncture," though he didn't provide details2

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. The AI angle cuts two ways for the Fed: while strong productivity growth and robust capital investment signal economic strength and reasons to hike rates, Warsh has been optimistic that AI will eventually expand the economy's capacity and be disinflationary2

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. Investors should watch whether hyperscalers' insatiable appetite for capital continues at this pace, how the Fed's AI task force findings influence future policy, and whether the productivity gains from AI infrastructure materialize quickly enough to offset the near-term inflationary pressures from this unprecedented competition for capital.