The Fed, AI, and economic uncertainty: What investors need to know
MIT Sloan’s Gary Gensler and Peter R. Fisher advise investors to develop an AI investment thesis and avoid overconfident investing during policy pivots.
Between them, and have worked in public service for decades, having collectively held senior roles at the U.S. Treasury, the Federal Reserve Bank of New York, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. They’ve also had private-sector stints at Goldman Sachs (Gensler) and BlackRock (Fisher).
Last month, the two policy experts joined forces at the 2026 MIT Sloan Investment Conference to discuss how investors can grapple with artificial intelligence investment risks, what a leadership change at the Federal Reserve Bank might bring, and the market effect of what Fisher called “Trumpian uncertainty.”
While their conversation happened before the war in the Middle East upended financial markets, there was still plenty of volatility on Wall Street, and there were mixed messages from Washington to decode.
Here are three questions tackled by Gensler, an MIT Sloan professor of the practice and former SEC chair, and Fisher, a distinguished senior fellow at the MIT Golub Center for Finance and Policy and former head of fixed-income portfolio management at BlackRock.
How should investors navigate the AI boom?
After cautioning the audience that he and Fisher were not dispensing investment advice, Gensler said he believes that every investor should have an AI thesis. “Right now, if you are investing in this market and you don’t have an AI thesis — what it’s going to do to productivity, what it’s going to do to labor, to market concentration, to software — you’re probably going to miss out,” he said.
Leaving unresolved the question of whether the current market is more of a boom or a bubble, Gensler expressed concern over the gap between AI spending and AI revenues. Capital expenditures on data centers and other AI infrastructure reached $400 billion in 2025 and are expected to approach $500 billion to $600 billion this year; Gensler estimated that revenue generated directly from generative AI products and services was about $50 billion last year.
“There’s a disequilibrium. It’s got to sort itself out somewhere,” Gensler said. “I think there’s more downside risk than upside potential. When you look at the past booms — whether it was the internet, computers, whatever — after all the enthusiasm, there is usually consolidation.”
Fisher expressed concern that AI companies are under pressure to grow quickly and recover their infrastructure investments. “Anytime you scale up that much and it’s all fixed cost, investors have got to worry about whether they’re going to get paid back,” Fisher said. “You don’t scale up like that without screwing up your supply chains [or] having problems with quality control.”
What challenges will the incoming Fed chair face?
Fisher expressed concern that Federal Reserve chair nominee Kevin Warsh will have difficulty getting a read on the true state of the economy.
Historically, the Federal Reserve has relied on the Phillips curve — which describes the trade-off between unemployment and inflation — to set rates. But unemployment and inflation are no longer reliable cyclical signals, Fisher said.
“I think the Phillips curve has already blown up,” he said. “The information content of the unemployment rate just isn’t what it used to be. The labor market doesn’t seem to be generating a lot of jobs. People are trying to trade on it, and nothing much really happens.”
The inflation side of the equation “is even more disturbing,” Fisher said. “It’s really hard to sort out because of income inequality and wealth inequality.” The Fed’s ability to use interest rates to manage inflation assumes that higher borrowing costs will slow spending across the economy. But when 60% of consumption is concentrated among the top 20% of earners, who typically aren’t constrained by credit costs, that lever loses much of its force.
Gensler flagged a second lost signal: long-term interest rates.
Historically, central banks managed only short-term rates — overnight and three-month borrowing costs — while long-term rates were set by capital markets, which reflected the collective judgment of investors about future growth and inflation.
Quantitative easing changed that. Beginning in late 2008, the Fed purchased trillions in Treasurys and mortgage-backed securities, effectively taking over the pricing of long-term rates as well. In order to restore long-term interest rates as a market signal, Warsh will need to back away from that involvement without destabilizing the markets that now depend on it, Gensler said.
Artificial Intelligence for Financial Services
In person at MIT Sloan
Register Now
How should investors navigate the market risk created by unpredictable policymaking?
Taking care to frame their observations as investing analysis, not political commentary, Gensler said investors appear to have grown comfortable riding the wave of what some pundits have called the “TACO trade.” Short for “Trump always chickens out,” TACO trade refers to the cycle where policy decisions, such as tariffs, rattle the equities markets, causing the administration to pivot.
“The markets actually have gotten, I think, a little bit too confident about the pivots,” Gensler said. “Some of this uncertainty is actually directional: The U.S is withdrawing from the global order, and that means risk is higher. You need to have a higher risk premium somewhere in the system.”
Gensler identified several dynamics working against long-term U.S. growth:
- A U.S. retreat from the multilateral trade and security order built over the last 80 years
- A decline in federal investment in research and development
- Reduced immigration, which suppresses GDP growth
- Weakening institutional independence at the Federal Reserve and the Justice Department
Taken together, those forces could weigh on U.S. growth prospects over five to 10 years in ways that current equity valuations may not yet reflect. The dollar’s decline of roughly 10% and the relative outperformance of European and emerging markets may be early signals that a repricing is underway, Gensler said.
Fisher added a parallel concern about investment allocation: Policy uncertainty doesn’t just create volatility; it distorts where capital flows, he said.
Right now, money is concentrating in the sectors President Donald Trump visibly favors, particularly AI and domestic manufacturing. “We see money pouring into one sector of the economy, [but] there’s less of it going into other sectors. And that’s going to weigh productivity down in the next three or four or five years,” Fisher said.
“Power and Consequences” podcast: “The Federal Reserve and Monetary Policy”
Peter R. Fisher is a distinguished senior fellow at the MIT Golub Center for Finance and Policy. Fisher previously held a variety of roles at BlackRock, including head of fixed-income portfolio management and chairman of BlackRock Asia. Before joining BlackRock, Fisher served as the undersecretary of the U.S. Treasury for Domestic Finance and also worked at the Federal Reserve Bank of New York, concluding his service as an executive vice president and manager of the Federal Reserve System Open Market Account.
Gary Gensler is a professor of the practice of global economics and management and of finance at MIT Sloan. He is a former chair of the Securities and Exchange Commission, former chair of the Commodity Futures Trading Commission, previous undersecretary of the Treasury for Domestic Finance, and former assistant secretary of the Treasury. Before working in public service, Gensler was a partner at Goldman Sachs. Along with Simon Johnson, Gensler recently launched a podcast, “Power and Consequences.”
