AI Selloff Could Hand the Fed a Win on Inflation

BMO Capital Markets senior economist Jennifer Lee says the AI stock rout might do the Federal Reserve a favor. The pullback could cool the data center building boom that has been pushing prices and borrowing costs higher. She made the case on Bloomberg This Weekend on November 1.

The setup: hyperscalers have been borrowing heavily to fund their data centers, and that corporate debt demand was one of the forces lifting interest rates, Lee said. Add elevated energy prices and fiscal worries, plus Treasury buyers who may be less dependable than they used to be. The construction spree also siphoned land, skilled labor and materials away from other industries, which Lee said crowded out rivals and made inflation stickier.

Her logic runs simple: less building, less pressure. If hyperscalers pump the brakes, the cooldown would make the Fed's inflation fight easier. The market is already moving that way. The Nasdaq-100 slid into its third correction of 2026 last week, and the S&P 500 dropped 1.8% on Friday.

Crypto feels it through two channels moving at different speeds. BitMine Chairman Tom Lee tied the recent digital asset slump to the AI selloff in an October 26 release, noting crypto got dragged down by the same risk-off forces. He also pointed out the damage has been milder than in past cycles, with ETH down 13% from its recent peak while US semiconductors ($SOXX) fell 20% over the same stretch.

The second channel could cut the other way. If the selloff keeps rates low, bonds and cash pay less, making Bitcoin and Ethereum look more attractive by comparison. But that relief needs yields to stay down for weeks, while the risk-off hit lands right away. And the Fed isn't in a giving mood yet. It hiked by 25 basis points on September 16, then held at 3.75% to 4% on October 28, with two officials voting for another increase. Lee called Chair Kevin Warsh's press conference fairly hawkish and said a December tightening sounds like a foregone conclusion.

Next up: this week's payroll report and earnings from Apple, AMD and Qualcomm will show whether the cooldown actually holds.