The Federal Reserve's first policy meeting under Chairman Kevin Warsh highlighted a big focus on artificial intelligence spending. Bond markets are listening.
Minutes of the Fed's June meeting, where interest rates were kept unchanged at between 3.5% and 3.75% but communication was sharply pared back under Warsh's new leadership, suggested a hawkish stance among Fed governors, many of whom remained focused on inflation pressures in the world's biggest economy.
That view, which came during peace talks between Washington and Tehran last month, is likely to change abruptly over the next few weeks as the two sides trade attacks in the Gulf region, and President Donald Trump declares the current state of discussions as a "waste of time."
Brent crude prices have vaulted nearly 10% since the start of the month, and were trading north of $78 a barrel, while U.S.-focused WTI crude is up 8.1%.
But perhaps more important is the Fed's tone on artificial intelligence, which garnered mention in the second paragraph of its statement, and the impact of the new technology's investment wave on jobs, growth, and inflation -- and virtually everything else.
"AI is now central to the Fed's macro framework," said Russ Brownback, deputy CIO for global fixed income at BlackRock, who argued that Wednesday's minutes hinted at AI's disinflationary forces but noted worries about its early impact.
"AI-related capital spending is supporting activity, earnings, equities, high-tech trade, data centers, software, and electricity demand," he added. "Productivity gains may eventually boost supply and lower costs, but in the near term, the AI buildout is adding to demand and price pressure."
The biggest AI hyperscalers, including Microsoft, Amazon, Google parent Alphabet, and Meta Platforms, are set to spend more than $725 billion on AI buildouts this year, with Goldman Sachs pegging the five-year tally ending in 2030 at around $5.3 trillion.
Inflation forecasts, meanwhile, are moving firmly higher, with estimates for headline readings in one year rising to the highest since 2023, according to recent data from the New York Fed, with the 3-year forecast hitting the highest since 2022.
That's having a mixed effect on the Treasury market, which has seen a sharp move higher in yields over the past week, pushing 10-year note yields firmly past 4.5% and longer-dated 30-year bond yields north of 5%.
Wednesday's $39 billion auction of 10-year notes, held before the minutes were published, drew solid demand, but the Treasury effectively had to pay the highest borrowing costs since February of 2025 to do so. And demand at that time, it must be remembered, came amid a rate-cutting forecast that eventually trimmed the fed-funds rate by 75 basis points.
The picture today is very different.
July rate-hike bets are still muted, at less than 30%, but the odds of an increase in September are trading at more than 60%, with the chances of a follow-on hike before the end of the year holding at around 44%.
That's likely to keep the upward bias on Treasury yields, which have seen 10-year notes rise more than 60 basis points since late February, with rate-sensitive 2-year notes adding more than 80 basis points, well into the back half of the year.
How that weighs on stocks, which remain focused on tech's contribution to the second quarter earnings season and profitability through the end of the year, remains to be seen.
Mark Newton, head of technical strategy at Fundstrat, says the speed of change in bond markets, with a focus on the Cboe Group's 10-year Treasury note index (TNX), will prove key.
"A slow grind higher in yields likely leaves equities unaffected," he said. "While a rapid move, which I suspect unfolds if yields push back up above mid-May peaks at 4.687%, could carry the TNX up quickly toward and above 5.00%."
"In the next couple of weeks, there could be some backing and filling to this initial pop in yields, so I'm not sure it's right to grow overly concerned just yet," he added. "However, this 'rally' in yields looks to have begun, technically, and the key level will be when the TNX surpasses mid-May highs."
Write to Martin Baccardax at martin.baccardax@barrons.com
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(END) Dow Jones Newswires
July 09, 2026 08:01 ET (12:01 GMT)
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