The Fed Is Ready to Hike Rates Into the AI Selloff
Two Fed presidents argued Thursday for more rate hikes to cool inflation, on the very day the AI trade posted its worst session since 2025. Wall Street wants a rescue; the Fed is signaling the opposite.
Wall Street spent Thursday dumping the stocks that had carried the AI boom. Two Federal Reserve presidents spent the same day arguing that the boom is still feeding inflation, and that rates need to keep going up.
The Nasdaq slid into correction territory. The Magnificent Seven lost more than $1 trillion in market value. Richmond Fed President Thomas Barkin and Cleveland Fed President Beth Hammack both favored further tightening.
Investors sold AI names on the bet that a slower buildout will cool the economy. The Fed's hawks treated that same investment wave as the reason inflation remains too hot.
The AI trade's worst day since 2025
The S&P 500 fell about 4.4%, the Dow dropped roughly 1,833 points, or 3.4%, and the Nasdaq fell 5.5% into correction territory. All three major indexes posted their steepest one-day declines since April 4, 2025, the tariff shock.
The Magnificent Seven lost more than $1 trillion in aggregate market cap. Nvidia led, shedding more than $440 billion and falling more than 9%. The chipmaker turned negative on the year, down 2.6% year-to-date. Information technology fell 7.30%, its worst day since March 16, 2020.
AI-linked stocks led the decline as investors worried data-center buildouts could slow after Democrats won control of Congress. The selloff more than erased the prior day's gain, which was the market's best in three months. The Nasdaq finished 11.9% below its all-time high.
Hawks still see inflation running too hot
Two officials made the case Thursday for modest and steady interest rate increases to tackle above-target inflation.
Barkin, in a CNBC interview at the Richmond Fed's 2026 CFO Summit, said he expects the central bank "will have to raise interest rates further," though he is unsure how much or at what pace. "Unemployment's near record lows, and inflation is too high. That means the path is pretty straightforward. The question, of course, is pace," he said. "Gradual makes sense." He called inflation "the most important risk right now."
Hammack, speaking in Zurich, said: "I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner." She prefers getting to that stance through more frequent smaller adjustments when possible. She is one of the central bank's most steadfast supporters of boosting short-term interest rates and voted with Fed Governor Lisa Cook in favor of a rate hike last week.
Last week the Fed left its benchmark rate in the 3.75%-4.00% range even as policymakers acknowledged inflation was above where they want it. The Fed raised rates in September, and markets broadly expect another increase in December. Futures traders are pricing a December hike at roughly 70%, down from more than 80% on Wednesday, according to CME FedWatch. Fed Chairman Kevin Warsh has eschewed providing guidance about the future path of policy.
Inflation heated up again on the imposition of tariffs and was further exacerbated this year by the AI buildout's hot investment. Barkin said AI is one source of price pressures now, though it will eventually spur production and ease inflation later.
Markets sold AI names on the idea that regulation, taxes, and permitting after the midterms could slow the capex wave. Evercore ISI told clients AI capital expenditures "will be slowed down some by permitting challenges in large states including Texas, easing overheating risk in the next year or two and plausibly extending the AI investment cycle." TD Securities said it remains confident the Fed will hike a total of half a percentage point by the start of next year, adding the Fed might not tighten after March if the midterms bring closure on the Middle East conflict or AI investment is pared back.
Friday's government jobs report is the next test. Economists see hiring up 65,000 in October after September's 29,000 gain, with the jobless rate steady at 4.2%.
The $500 billion credit warning
Barkin also flagged the financing behind the buildout. Debt issuance to hyperscalers is estimated this year at better than $500 billion and is "worth watching" for potential credit issues.
He said it is hard to convince yourself the big hyperscalers generating so much cash from their core businesses are not good credits. The question, he added, is the layer below them: "it's more who are the intermediaries in this world who are taking on risks that you don't know about... You do wonder where in the intermediary sector is the biggest risk."
The market dumped AI-linked stocks because it expects a slowdown to cool inflation and take the Fed off the hike path. Barkin and Hammack described the opposite sequence: inflation still too high, unemployment near record lows, AI still adding to price pressure, and more modest, steady increases ahead. The same Richmond president who wants those hikes is watching better than $500 billion of hyperscaler debt, and the intermediaries behind it.
Wall Street wanted a rescue. The hawks spent Thursday arguing for hikes into the selloff.
