“Capital demand moves first. Supply capacity catches up later.”
Kashkari has raised his estimate of the neutral funds rate to 3.25%, with the AI investment boom one reason equilibrium rates may be higher.
That is the macro signal: AI is not just raising growth expectations. It is raising investment demand faster than productive capacity can respond.
What Higher Rates Decide
the two transmission channels
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Higher real yields determine who can keep investing. Cash-rich AI leaders can continue funding the build-out.
Weaker firms face higher financing costs, which force lower capex, slower adoption, and wider competitive gaps. signal: Real yields sort the field into those who can keep building and those who cannot.
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Higher hurdle rates impose a harder market test. Distant AI promises meet higher discounting and lower valuation support, while visible AI returns deliver higher margins, higher ROIC, free cash flow, and self-funded reinvestment.
The hierarchy is shifting from AI narrative to AI capex to AI adoption to AI monetization to free cash flow. The new divide: AI monetizers vs AI capital consumers. signal: The market now prices economic capture, not AI exposure.
The Recursive Loop
where the regime meets the K-shaped economy
watch two variables
- Real rates — the cost of staying in the build-out.
- Cash-flow conversion — the proof of economic capture.
- The next equity rotation will favor the companies that can keep investing.