Back in 2000, as the Federal Reserve raised interest rates, entrepreneurs and investors surfing the internet wave insisted it didn’t matter. “Everybody knows the Fed’s going to raise rates in February, but as this comes closer, VCs are throwing ever larger amounts of money at us,” one told my then-colleague Jacob Schlesinger.

We know what happened next. The Fed kept raising rates and the internet-stock bubble imploded.

Déjà vu: The same arguments are being recycled today for artificial intelligence. What if “the demand for intelligence and energy is unaffected by higher rates because winning the race for super intelligence has a near infinite ROI,” hedge-fund manager Bill Ackman asked on John Arnold, co-chair of Arnold Ventures, argued higher rates could be “counterproductive” for inflation: They won’t reduce demand for AI inputs, but do “raise business operating expenses, some of which is passed along to consumers.”Let me set the record straight: The Fed is entirely capable of deflating the AI boom and inflation. Skeptics assume interest rates could only slow AI companies by raising their cost of borrowing.

That is a fallacy. Short-term rates are the benchmark cost of liquidity, affecting overall financial conditions. With each successive increase, tighter credit ripples out along the risk spectrum, from Treasurys to corporate and household loans, equity and so on. The leveraged investors who buy risky assets see their funding squeezed. Appetites for initial public offerings, high-yield bonds, private credit and securitizations dry up. This is why asset meltdowns through history bear the Fed’s fingerprints: the 1929 and 1987 stock-market crashes, the dot-com and housing busts, emerging-market crises in 1982 and 1997-98.

As assets deflate, investment follows and sometimes recession comes next. And with recession, inflation goes down. To be clear, the Fed doesn’t want to end the AI boom.

It only wants overall inflation to fall to 2%, which doesn’t require that AI-related inflation do so as well. But make no mistake: If the only way to 2% inflation is to drain the lake of liquidity sustaining AI, the Fed has the means and, very likely, the will to do it.

Governments are “drowning in slop” thanks to AI, British writer Sam Freedman observes.

From the U.S. to Europe and Australia, government agencies are seeing a sharp rise in requests for things like records or consumer complaints, presumably because chatbots have made it effortless to file forms. Governments are going to have to adjust. “Modern administrative states are built around processes that are difficult to use, often deliberately so, which helps ration demand,” Freedman writes. “AI blows this assumption apart.”The new American status symbol is a third child, writes Michael Konczal of the Economic Security Project.

Analyzing a Fed survey, Konczal finds that nearly half of families with top-percentile incomes have three children or more. Among families just a bit less well off, only around 40% have at least three children. It is a sign of how rising costs for housing and child care are shaping family planning. In the past, it was lower-income families that tended to be larger. “This is [just] a correlation, but it’s the one you’d expect if money solves the hard parts of raising kids,” Konczal writes. Rising interest rates have pushed aside the trade war as global policymakers’ biggest anxiety, Harvard’s Jason Furman reports from the IMF meetings in Bangkok: “No one cares about tariffs anymore, they expect them to continue forever and have adjusted and moved on. Everyone cares a lot about high interest rates. They expect them to continue forever but they haven’t moved on. Oil prices fall somewhere between these two. Everyone cares some, aren’t sure if they’ll continue and have partially moved on.”

Jerome Powell’s close relationships on Capitol Hill were no accident.

As Fed chair, Powell held more meetings with political figures—mostly lawmakers—than his predecessors did, Thomas Drechsel of Johns Hopkins and Dali Tsakadze of the University of Maryland find, based on extensive study of recent Fed chairs’ public calendars. They also find that Fed chairs rely heavily on the central bank’s in-house economists, and that meetings with reporters have grown more common over the past 15 years. Subscriptions make our journalism possible.

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I’ve been writing about economics, markets and politics for more than 40 years, in the U.S. and from around the world. WSJ Economics brings you essential insights, news and commentary, twice weekly.

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