Warsh's Dilemma: Rate Hikes vs. Economic Reality
As markets debate what's next in the compute space, Fed Chair Kevin Warsh faces a difficult decision this week: whether to hike interest rates or hold steady. The market is pricing in a 90% chance of a rate hike, which would help the longer end of the yield curve but come at a cost. With $6 trillion of T-bills maturing in 2026 and a Federal Reserve balance sheet of $6.7 trillion, most funded overnight, any hike will increase the country's interest expense.
Warsh's dilemma is not just about economic numbers; it's also about politics. President Trump may not appreciate the idea of a rate hike, even if it helps the longer end of the yield curve. Additionally, hiking rates won't address the current drivers of inflation, which are supply disruptions and global refining issues rather than excess demand.
The compute spend, driven by AI and related technologies, continues to rise despite the debate around its impact. The companies behind this trend are starting to do better outreach and engagement with local communities, but it's unlikely that rate hikes will slow down the compute spend. In fact, the only way to slow it down is if the perception of the addressable market decreases.
Meanwhile, concerns about oil prices and supply disruptions persist. The pipeline used by Saudi Arabia to bypass the Strait of Hormuz has been hit, and tensions between the US and Iran remain high. Diesel prices have reached a record high, affecting shipping and agriculture. The reserve of 285 million barrels is being depleted rapidly, with 125 million barrels extracted since the start of the war.