The Fed holds rates steady… plenty of unknowns as we look ahead… an area of the market acting independently of the Fed and interest rates… another red flag in private credit… “follow the money” into AI bottlenecks
This afternoon, the Federal Reserve wrapped up its March meeting.
As expected, there were no changes to interest rates. The Fed held its benchmark rate steady at a target range of 3.50% – 3.75%.
The real story today wasn’t the decision – it was the overall message…
The Fed is in no rush to change rates as it looks ahead to an uncertain future.
Let’s start with what we do know.
According to the updated Summary of Economic Projections (SEP), policymakers now project:
- Just one quarter-point interest rate cut by the end of the year, and one in 2027
- A 2026 GDP of 2.4%, up from December’s 2.3%
- And an uptick in inflation, with the Personal Consumption Expenditures rising to 2.7% for 2026, up from 2.4% in December
But what jumped out to anyone listening to Federal Reserve Chairman Jerome Powell’s press conference was the repeated reference to “uncertainty.”
Here’s how legendary investor Louis Navellier put it in his Growth Investor Flash Alert podcast:
What stood out to me was how cautious – and frankly how vague – the Fed sounded about the economy.
In the official statement, our central bank acknowledged that “job gains have remained low” and said the fallout from the Middle East is “uncertain.”
They said, quote unquote, “the implications of developments in the Middle East for the U.S. economy are uncertain.”
So, that’s kind of weeny language that they don’t know what the hell’s happening.
Looking beyond the Middle East, here’s a quick tour through Powell’s commentary on the other big issues facing the economy and the investment markets:
- Inflation progress: “The forecast is that we will be making progress on inflation, not as much as we had hoped, but some progress on inflation.”
- On tariff-based inflation: Powell said it should be a “classic one-time thing.”
- On the risk of stagflation: “I would reserve the term stagflation for, you know, a much more serious set of circumstances… It’s a very difficult situation, but it’s nothing like what they faced in the 1970s.”
- On future rate cuts: “The rate forecast is conditional on the performance of the economy. So, if we don’t see that progress. Then you won’t see the rate cut.”
Altogether, Powell didn’t sound alarmed, but neither was he signaling confidence.
He described the economy as “solid,” while repeatedly emphasizing just how uncertain the outlook has become.
That combination – a relatively steady economy alongside rising uncertainty and persistent inflation – is exactly what’s keeping the Fed on hold.
The market didn’t like it…
All three major indexes finished more than 1% lower today, led by the Dow, off 1.63%.
To be fair, the downturn may have been caused as much by the surge in natural gas prices after Iran attacked a major liquefied natural gas site in Qatar. This is sparking concerns about threats to energy facilities across the Gulf.
Bottom line: Powell offered no real reassurance about rate cuts, warned that higher energy prices could lift inflation, and underscored just how uncertain the economic outlook has become.
So, for investors, this leaves us with one underlying question:
What actually works in an environment like this?
A different kind of economic engine
First, let’s recognize that not all parts of today’s economy are responding to Fed policy in the same way.
In fact, one of the most powerful forces in the market right now is operating almost independently of it…
AI.
Specifically, I’m talking about the buildout of the infrastructure required to support it – and its colossal scale.
For details, here’s Bloomberg:
Four of the biggest US technology companies together have forecast capital expenditures that will reach about $650 billion in 2026 — a mind-boggling tide of cash earmarked for new data centers and all the gear housed within them.
The spending planned by Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Microsoft Corp. is a boom without a parallel this century.
Each of the companies’ estimates for this year is expected either near or surpass their budgets for the past three years combined.
But while the headlines focus on the sheer size of this spending, what matters just as much for investors is its persistence – and its relative immunity to anything the Fed does.
The hyperscalers are not making quarter-to-quarter decisions based on incremental changes in interest rates. They are making multi-year strategic bets on what they believe will be one of the most important technological shifts in decades.
And once those bets are in motion, they’re very difficult to slow down.
That’s why this corner of the market behaves differently.
While the Fed is trying to manage demand by tightening financial conditions, the hyperscalers have effectively created their own investment cycle – pouring capital into data centers, power infrastructure, networking equipment, and the broader ecosystem required to make AI work at scale.
In that sense, this isn’t a liquidity cycle driven by cheap money. It’s a capital cycle driven by necessity – one that’s operating largely outside the traditional economic playbook.
But not all AI stocks are a buy today
In fact, we’re starting to see early signs of stress in one corner of the AI trade – and it’s coming from a place I’ve been warning about with increasing frequency recently…
Private credit.
Yesterday brought another red flag, this time from Morgan Stanley. Here’s CNBC quoting an analyst from the big bank:
More pain is coming in private credit as defaults ramp up…
We expect direct lending default rates to reach 8%, approaching Covid peak levels.
So, on one side of this trade, you have enormous capital flowing into AI infrastructure.
On the other side, you’re beginning to see signs of strain in parts of the ecosystem – particularly software and the lenders backing it – facing real economic pressure.
And we’re already seeing where that pressure is showing up.
Private credit firms like Blue Owl Capital (OWL) and Blackstone (BX) have both come under pressure this year as concerns build around their exposure to software loans – many of which were underwritten on the assumption of steady, predictable cash flows.
We first warned you about both companies back in our June 12, 2025 Digest. Since then, BX has lost 20% while OWL has imploded 50%.
You also need to be careful about software stocks.
Many of these businesses were built on the assumption of steady, recurring demand – but AI is beginning to challenge that assumption by automating the very workflows those companies monetize.
A recent example is Adobe (ADBE), which we warned about in our August 26, 2024 Digest. It’s lost 54% since then.
As AI systems begin to automate more complex workflows, certain software business models are starting to look more vulnerable – and that raises questions about their ability to service debt.
That’s why Morgan Stanley is warning that default rates in direct lending could climb toward 8%.
For investors, the takeaway isn’t that the entire AI trade is at risk – it’s a recognition that not all parts of the AI ecosystem are equally positioned. Some areas are absorbing capital. Others are starting to feel strain.
Bottom line: If you have exposure to private credit managers, BDCs, or software-heavy lending portfolios, this is one area worth reviewing closely right now.
So, back to the key question: where do we invest today?
Circling back to the winners of this AI boom, let’s stick with a simple principle:
Follow the money.
Where are all those billions of hyperscaler dollars headed?
The obvious answer is “AI infrastructure.”
But the more useful answer right now is: where demand is overwhelming supply. Recent history shows that this is where the biggest opportunities are emerging.
Over the last few years, we’ve seen this dynamic play out in the earliest phases of the AI boom.
At first, the constraint was computing power – and companies supplying GPUs captured enormous gains.
Then came servers… then cooling… then power.
Today, a new set of constraints is emerging – and that’s where the opportunity is beginning to shift.
We’ve been tracking this in the Digest over the past week
We looked at copper…
It’s embedded in nearly every layer of AI infrastructure – from data centers and power grids to networking equipment and cooling systems. It’s one of the foundational materials behind the entire buildout.
Then memory…
It enables the processing and movement of the massive datasets that power AI systems – particularly the advanced chips required to train and run modern AI models.
And then there’s energy…
It powers everything – from data centers to cooling systems – and is quickly becoming one of the biggest constraints on how fast new AI capacity can come online.
Across each of these areas, the pattern is the same…
Demand is surging, but supply isn’t keeping up. And this imbalance is creating very specific pockets of opportunity.
This is what our macro investing expert Eric Fry detailed this morning in his FutureProof 2026 event.
He focused on the specific parts of the AI buildout where supply constraints are becoming most pronounced – and where that imbalance could translate into outsized investment returns.
He also highlighted 15 companies positioned across these emerging constraints – spanning raw materials, energy infrastructure, and advanced memory – the areas where supply is struggling most to keep up with demand.
If you missed it, you can catch the full replay here.
Coming full circle
Let’s bring this back to where we started.
The Fed is navigating an environment where inflation remains somewhat elevated, growth is holding up but uneven, and the outlook is unusually uncertain.
That’s a difficult mix.
It’s not stagflation in the classic sense – and Powell was careful to make that distinction this afternoon – but it’s close enough to keep the Fed cautious and markets on edge.
That’s the kind of backdrop that can weigh on broad indexes… compress valuations… and create a more challenging environment for average stocks.
But the AI infrastructure buildout doesn’t fit neatly into that framework.
If anything, it’s operating under a different set of rules – driven less by interest rates and more by the sheer scale and urgency of hyperscaler investment.
That doesn’t mean it’s risk-free. But it does mean it’s not experiencing the same pressures that define most of the economy right now.
And in today’s market environment, that distinction can make all the difference in your portfolio.
We’ll keep you updated as this evolves here in the Digest.
Have a good evening,
Jeff Remsburg
