The Fed did what everyone expected: it did nothing. On Wednesday, October 28, the central bank held its benchmark interest rate at 3.75%-4.0%, keeping the brakes firmly on despite inflation remaining above the 2% target. The last move was a 25-basis-point hike in September. For traders watching the FOMC dot plot, this isn't a pause. It's a setup for more pain ahead.
William Lee, Chief Economist at Global Economic Advisors, isn't just predicting one more hike in December. He sees another coming sometime next year. Why? Because the AI capex boom is hungry for cash, and it's eating debt. "The focus on AI financing... represents a rise in potential systemic risk," Lee said. He’s pointing to a massive pile of private, opaque, variable-rate debt that has no real confidence backing it. That’s a fragile foundation for a trillion-dollar tech buildout.
Here’s the kicker for equity portfolios: the 'Magnificent Seven' era is over. Lee argues the market is shifting into a stock-pickers' regime. Companies with strong cash flows will survive. Those relying on debt to fund their AI dreams? They’re exposed. "You no longer have Magnificent Seven... It's going to become a stock pickers market," he noted. The differentiation is already happening. Investors are starting to price in the risk of weaker balance sheets.
Long-term yields are climbing, not because of Fed chatter, but because of fiscal reality. Government deficits are swelling across major economies, and AI infrastructure borrowing is piling on top. Lee cites former Fed Governor Kevin Warsh’s recent warnings: AI spending wasn't insulated from higher borrowing costs. The market is finally waking up to that. If defaults start in private credit, the contagion risk spreads to banks providing backup lines. That’s a tail risk nobody wants to model on a Friday afternoon.
Lee’s bottom line? Rates should be higher. Demand for capital is excessive, and the market needs to ration it. He dismisses the idea that rates will drop soon. "Lower rates would only return if a severe financial downturn triggered widespread defaults," he said. Let’s hope that’s not the path we’re walking down. For now, the Fed is watching inflation. The market is watching the debt piles.