The Federal Reserve's latest rate hike decision is perhaps a more significant variable for the AI industry in the short term. Of course, long-term bond yields had already been climbing, but this move raises short and medium-term borrowing costs, which is bound to curb the debt-fueled AI boom, especially given the possibility of further hikes later this year.

The entities most impacted by rising interest rates are undoubtedly small companies with weak or no credit ratings that urgently need to raise capital, such as emerging cloud providers planning to build new cloud infrastructure and finance data center projects. For instance, Rum Group plans to build a large data center in Georgia to support its partnership with Anthropic, but project funding has yet to be secured. (For more on the financing challenges facing startups, see here). However, the ripple effects of higher rates will eventually reach all players, including the big tech firms spending heavily on expanding their AI data centers.

Major tech leaders like Amazon, Meta Platforms, and Google have mostly borrowed aggressively in advance, providing themselves with some cushion. Just this Monday alone, Amazon issued £4.2 billion in bonds (equivalent to approximately $5.7 billion). Combined with the $67 billion it raised in the first half of the year, its debt load has nearly doubled. According to Amazon's securities filings, most of the bonds issued this year carry fixed interest rates, meaning its interest expenses won't increase even as rates rise. Google and Meta have also issued bonds to varying degrees. Yet, given their current spending pace, they will still need to borrow more in the near future.

Take Amazon's financing as an example. Its borrowing is used to cover hefty capital expenditures and investments in Anthropic and OpenAI. As of June 30, the company's cash position stood at $123 billion, roughly unchanged from December 31 of last year. But after June 30, Amazon injected an additional $21 billion into OpenAI, completing a $50 billion investment commitment. Data from S&P Global Market Intelligence shows analysts estimate Amazon will burn through $10 billion in cash in the second half of this year, and another $43 billion in the first half of 2027.

Admittedly, these big tech firms hold high credit ratings from rating agencies, giving them better financing conditions than smaller companies. However, the impact of the Fed's rate hikes should not be underestimated. Funding costs have already risen, and the outlook for the AI industry has become even more uncertain.