Stuffing banks with reserves via Quantitative Easing doesn't spur lending if there's no real economy demand. The current shift is driven by a genuine "pull" for credit from sectors like AI and onshoring, making banks willing to lend, which is a far more powerful economic force.

AI challenges traditional monetary policy logic. Historically, lower interest rates spur capital investment that creates jobs. However, if lower rates now incentivize investment in job-reducing AI, the Fed's primary tool for boosting employment may become less effective or even have ambiguous effects, a new dynamic policymakers must understand.

Recent inflation was primarily driven by fiscal spending, not the bank-lending credit booms of the 1970s. The Fed’s main tool—raising interest rates—is designed to curb bank lending. This creates a mismatch where the Fed is slowing the private sector to counteract a problem created by the public sector.

The post-Powell Fed is likely to reverse the QE playbook. The strategy will involve aggressive rate cuts to lower the cost of capital, combined with deregulation (like SLR exemptions) to incentivize commercial banks to take over money creation. This marks a fundamental shift from central bank-led liquidity to private sector-led credit expansion.

For the past decade, the Fed was the primary driver of liquidity. Now, the focus shifts to commercial banks' willingness and ability to create credit to fund major initiatives like AI and onshoring. Investors fixated on Fed policy are missing this crucial transition.

Unlike equities, credit markets face a growing risk from the AI boom. As companies increasingly use debt instead of cash to finance AI and data center expansion, the rising supply of corporate bonds could pressure credit spreads to widen, even in a strong economy, echoing dynamics from the late 1990s tech bubble.

Credit spreads are becoming an unreliable economic signal. The shift of issuance to private markets reduces the public supply, while the Federal Reserve's 2020 intervention in corporate debt markets permanently altered how investors price default probability.

Modern Western economies are dominated by services (media, law, medicine) that are not capital-intensive and don't rely heavily on borrowing. This diminishes the impact of interest rate changes on the real economy, explaining why aggressive rate hikes haven't caused a recession and why low rates post-2008 didn't create inflation.

The massive increase in government debt held privately has broken the monetary policy transmission mechanism. When the Fed raises rates, the private sector's interest income from Treasury holdings now rises significantly, creating a stimulus that counteracts the tightening effect on borrowing costs.