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Fed Keeps Rates Steady…Warsh Offers a Great Lesson in Saying Nothing…Why AI Might Keep Rate Hikes…Two More Reports from Super Expanders Today…Luke Lango’s AI MegaDeal Event Last Chance
I wasn’t expecting new Fed Chairman Kevin Warsh to provide many details in his press conference today, but even I was impressed by how he was able to use so many words to convey so little meaning.
More on that in a moment…
First, in a 9-3 vote that revealed growing “family conflict” within the central bank, the Fed decided to hold its benchmark interest rate steady at its target range of 3.5% to 3.75%.
Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lori Logan of Dallas were the three Fed chairs who voted to raise interest rates by a quarter of a percentage point. This matches their position they took in late April, when they opposed statement language that implied future cuts.
In keeping with Warsh’s stated philosophy, the FOMC’s official statement completely omitted the typical forward guidance that market participants typically rely on to anticipate future policy shifts.
Although it clearly documented the 9-3 dissenting vote, the text of the statement itself was a carbon copy of the June statement – stating only current economic realities without helping investors. In other words, this is exactly what Warsh told us – just the facts.
Turning to Warsh and his press conference, there was one thing he was frank about – that the Fed would not quietly accept a target inflation rate higher than 2%.
From workshops:
Five years of high inflation have left a false impression that is difficult to shake: that the Fed’s implicit inflation target was somewhat higher than 2%.
Let me repeat: There is no soft inflation target, no implicit soft target, and it is not under this committee’s watch. There is only a target of 2%.
Beyond that, Wershe provided a great lesson in not saying anything substantive.
He didn’t offer any real details or expectations, preferring answers that were more along the lines of, “We have a great team… We agreed on more than we disagreed on… We’ll get the job done.”
Frankly, all Wershe did was talk about the group talking about inflation.
Here is an example:
Much of our focus has been on trying to understand and quantify underlying inflation dynamics amidst (supply) shocks. We take these shocks seriously. There have been a series of them that have hit this economy.
We don’t look through them and say, “Oh, they don’t matter.” What we are trying to understand is to what extent these shocks expand in their impact, and in their impact on prices that are far from them?
Now, despite Warsh’s refusal to provide advance guidance, the market is interpreting the three hawkish opposition as a signal that the Fed is approaching a tightening cycle.
As I write immediately after the press conference, CME Group’s FedWatch tool estimates the probability of a September rate hike at 53.3%.
I’m not sure…
Why is the hiking bar higher than it appears?
Hawks who are already considering a September rate hike as insurance are missing something important.
Warsh has set a really high bar for raising interest rates – and at first glance, that seems inconsistent with the point we spent two years covering in this. digest…
Artificial intelligence makes many things more expensive.
Construction has created massive demand for graphics processing units, memory chips, networking equipment, electrical and cooling systems, switches and data centers. We’ve tracked how rising memory costs play out in consumer electronics.
Through this lens, AI appears unambiguously inflationary. More spending, more demand, higher prices. That’s certainly one way to read what’s going on.
But Warsh seems to have something else…
Don’t forget what Warsh told the Senate
Earlier this month, during a Senate Banking Committee hearing, Sen. Jack Reed pressed Warsh on the AI boost and the inflationary pressures it might create.
Reed noted that some Fed officials have become increasingly concerned that a wave of investment in artificial intelligence could complicate inflation expectations.
Warsh agrees that investment in artificial intelligence is likely to push prices higher over the next year. But he then repeated a point he had made before, which is that measuring the impact of the AI boom on demand is easier than measuring its impact on the economy’s ability to provide goods and services.
Then he said:
I don’t see a one-time change in prices as necessarily inflationary because I think there is a supply response.
Will measured prices increase over the next 12 months?
I think he will…. Whether that is inflationary or not is up to the Federal Reserve.
Let’s be clear about what Warsh isn’t saying
He is not claiming that AI will not raise prices, but rather that he clearly expects it to.
But then he redirects it to a very important question: Do these high prices represent the beginning of a sustainable inflation problem? Or is it simply the cost of building an economy that becomes much more productive in the future?
This distinction applies to almost everything Warsh has said about AI over the past year.
Writing in The Wall Street Journal Last November, he said investors were severely underestimating the economic impact of AI:
AI will be a powerful force for dampening inflation, increasing productivity and enhancing American competitiveness.
Improving productivity should lead to significant increases in real wages.
He explained why productivity is so important in his thinking:
A one percentage point increase in annual productivity growth would double living standards within one generation.
This is not the language of someone fixated on the latest edition of inflation. It is the language of someone who thinks in terms of how technological revolutions have reshaped economies for decades.
Legendary investor Louis Navellier, editor Growth investorHe made a similar point recently, approaching it as an investor rather than a policy maker.
Here’s Lewis:
Remember, AI is not inflationary. It is a temporary memory bulge. This is a weird thing because of the bottleneck.
But other than that, no. AI will deliver amazing productivity gains, a lot of GDP growth, and that’s about it.
The Fed does not increase interest rates. So, whatever the talkers on TV tell you, it’s not going to happen.
Different vocabulary, same basic reading: Remove the bottleneck once, and what’s left is not inflation, but productivity.
What this means – and what it doesn’t mean – for rates
The takeaway here shouldn’t be “Warsh pigeon camouflage will cut”.
During Warsh’s confirmation hearing, Senator John Kennedy noted that the new Fed chief’s optimism about artificial intelligence meant a more pessimistic approach to monetary policy.
Warsh rejected this framework outright:
That’s not how I would describe the story on AI.
The more accurate reading is that Warsh is raising the level of what would be considered inflation serious enough to justify raising interest rates.
That’s nothing for AI investors, who have watched their positions come under pressure over the past two years every time Wall Street spooked by the threat of higher interest rates for longer.
Growth stocks We live and die by the discount rate, and few sectors are more interest rate sensitive right now than AI, given how their cash flow-based valuation is still years away.
So, if Warsh wants to see inflation expand, productivity disappoint, or expectations fall flat before he treats AI-driven price increases as the “bad” kind of inflation, that is a materially higher threshold than the market was considering.
Of course, Warsh is only one voice within the FOMC. Today showed us that three other members are already prepared to cast the opposite vote.
Will Microsoft and Meta follow in Alphabet’s footsteps?
By the time you read this, we’ll probably already know.
Microsoft (MSFT) and dead (dead) Both reported earnings after the bell today, and their capex guidance is scheduled to be released alongside their earnings.
last week, alphabet (Google) It maintained – and actually increased – its capital plans. Wall Street punished it, sending it down nearly 7% the next day.
The question tonight is whether Microsoft and Meta will be treated the same way.
Will they maintain or increase their AI infrastructure spending? If they do, will Wall Street punish them the same way it punished Alphabet?
And even if Wall Street punishes them, will it finally reward smaller AI capital spending companies on the receiving end of hundreds of billions of dollars?
We will report tomorrow.
Final reminder about tomorrow’s match AI MegaDeal Event
As we just noted, Microsoft and Meta will tonight report how much they’re willing to spend to chase AI dominance.
Most investors watching these numbers already know the standard playbook: Buy the companies on the receiving end of all that capital expenditures — the chip makers, the data center operators, the name pickers and shovels who get money from Microsoft and Meta spending.
Luke doesn’t disagree with that trade. As we’ve been tracking here in the summary, he was looking for the technical bottom of the recent AI infrastructure sell-off, looking for a “back in the truck” moment.
But Luke would also agree that this is only half the picture – because some of these high-volume capital expenditures are not billed at all. It is paid in acquisitions.
Not only did Google buy the chips for its AI research, it also bought DeepMind directly. Not only did Meta pay a vendor money for training data, it wrote a check for $14.3 billion for a stake in Scale AI. Microsoft not only leased computing to a partner, it committed $23 billion to OpenAI when almost no one outside of Silicon Valley had heard the name.
This is a different way to profit from the same trillion-dollar spending spree: not selling the Giants what they need, but becoming the thing the Giants decide they need to have.
Luke’s research concludes that this pattern is about to be repeated, on a larger scale than any of these three examples. And tomorrow at 1 p.m. Eastern time at his home AI MegaDeal Event, You will learn what to do about it.
Sign up now, and you’ll also have the option to join Luke’s VIP text list. If you do this, he will send his reward report, AI Collector’s Portfolio: 7 stocks to buy for the biggest tech spending boom everfree.
So, last call! Just click here to reserve your seat We’ll see you tomorrow.
I wish you a good evening,
Jeff Remsburg
