Circle Founder Jeremy Allaire: Rate Hikes May Drive Up Inflation This Time

Jeremy Allaire retweeted the company's chief economist Gordon Liao's agreement with Bill Ackman, formulating it as an equation: higher interest rates equal higher inflation, and further questioning, "Is this time different?" Liao's original text states that the AI economy is a new paradigm, and at this moment, rate hikes could indeed elevate inflation; the entire economy has become accustomed to low-interest financing, and higher financing costs will be passed on to consumers.

On September 16, the Federal Reserve raised the federal funds target range to 3.75%–4.00%. Ackman's argument is that super intelligence and energy demand are insensitive to interest rates, with interest only being reflected in electricity prices and computing power contracts. Liao extends this same point from technology capital expenditures to the "whole economy's financing habits": interest expenses in the corporate sector are incorporated into end prices, rather than cutting AI and electricity orders first. Allaire succinctly unites hedge fund managers, stablecoin issuers, and former Fed economists on the same side.

Circle issues USDC, with reserves primarily in cash and short-term U.S. Treasury securities. Rising policy rates increase the yield on reserve assets and also raise financing costs on-chain and at banks. Liao previously researched short-term financing at the Fed, later becoming Circle's research head and participating in the design of the Arc settlement chain; he publicly views the pipeline, rather than the narrative, as the bottleneck. This statement frames the transfer of interest in the pipeline as an inflation mechanism, rather than advertising for stablecoins.

The feasibility of this transfer depends on whether demand is genuinely curtailed by rate hikes. Housing and automotive sectors may shrink, while data centers and training clusters may not shrink according to competitive logic. If the latter segment is large enough, the first-order effect of rate hikes is cost-push, and the second-order effect is demand contraction. Allaire leaves a question mark on "Is this time different?" effectively delegating the falsification task to the upcoming announcements of cloud prices, electricity prices, and core PCE.

In market mechanisms, what is sold is rolling financing from the low-interest era, and what is bought is computing power and electricity that must be delivered immediately. Funds from interest expenses after rate hikes flow into U.S. Treasuries, utilities, and GPU rentals, then return to residents with higher commodity and cloud bills. Beneficiaries are short-term Treasury holders and infrastructure sellers who can pass on costs, while pressured parties are downstream companies that cannot raise prices and interest rate options trading under the old Taylor rule. The rise in stablecoin reserve yields coincides with the increase in corporate financing costs.

Source: Public Information