Warsh warns AI capital could dry up as inflation cools to 3.5%

Federal Reserve Chair Kevin Warsh warned that capital could dry up for artificial intelligence companies that fail to meet investor expectations, marking a new front in the central bank's oversight of the technology sector.

"If AI companies let investors down, capital could dry up," Warsh said, according to a transcript of his remarks. He did not specify which companies or metrics he was monitoring.

The caution came as the Nasdaq Composite climbed 0.81 percent to 26,083.42, extending a rally driven by AI-related stocks. The S&P 500 rose 0.26 percent to 7,535.12, while the Dow Jones Industrial Average slipped 0.19 percent to 52,401.14. June inflation data showed the Consumer Price Index falling to 3.5 percent annually, down 0.4 percent month over month, driven by a 9.7 percent drop in gasoline prices. Bank stocks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. surged after earnings, while International Business Machines Corp. plunged on a profit warning.

The combination of cooling inflation and Warsh's AI warning creates a complex picture for investors: lower price pressures give the Fed room to hold rates steady, but the chair's rhetoric suggests a willingness to use moral suasion if AI investment becomes a stability concern. The Fed's next rate decision is scheduled for late July.

The AI Investment Boom Under Scrutiny

Nvidia Corp., Microsoft Corp. and Alphabet Inc. have been the primary beneficiaries of the AI investment wave, with the three companies adding hundreds of billions in combined market value this year. Warsh's remarks inject a new source of uncertainty into that trade, raising the prospect that the Fed could use its supervisory authority to curb lending to overextended AI startups or signal tighter conditions for the sector.

The last time a Fed chair issued a sector-specific warning of this nature was in 2022, when then-Chair Jerome Powell cautioned that cryptocurrency assets could trigger financial instability. Bitcoin subsequently fell more than 60 percent over the following six months, according to CoinGecko data. The parallel shows how central bank rhetoric can reshape capital flows into speculative assets.

Warsh, who took office earlier this year, has previously vowed to "do my job" if challenged by political pressure, showing his independence from the Trump administration. His focus on AI suggests the central bank views the sector's rapid growth as a potential source of systemic risk, even as inflation moderates to 3.5 percent.

Bond yields fell after the CPI release, with the 10-year Treasury declining as traders priced in a higher probability that the Fed will hold rates steady through year-end. The cooling inflation data gives Warsh room to avoid raising borrowing costs while maintaining the option to tighten if AI-related lending or asset bubbles emerge.

For investors, the key question is whether Warsh's warning is a one-off comment or the beginning of a broader regulatory push. If the Fed follows through with formal guidance on AI-related lending, it could slow the flow of capital into the sector and compress valuations for companies that have yet to generate meaningful revenue from their AI investments. Tower Semiconductor Ltd. and CleanSpark Inc., both of which jumped on company-specific news Wednesday, represent the kind of high-beta names that could face the sharpest repricing if capital conditions tighten.

This article is for informational purposes only and does not constitute investment advice.