Dear Friends and Colleagues,

 

 

I have been watching the Fed for about 25 years now. And I cannot recall a meeting with so much uncertainty as the one on September 18. The market is split on whether the Fed will do 25bp or 50bp. And there is even more uncertainty about where the Fed is ultimately heading. 4%, 3%, 2%, something different?

 

Given all the uncertainty about the the outlook, this is a great time for unique conceptual thinking and thoughtful data tracking. This is how to stay ahead of the competition. Uncertainty is also opportunity.

And over the last few months, we have indeed been highly focused on analyzing the destination of rates in the coming cutting cycle. Many of the theories used in 2022-2023 to argue for sustained higher rates (de-globalization, structurally higher commodity prices, pressure from supply) have been hard to match with the reality in the data picture in 2024. Relatedly, China continues to face a historical economic challenge, which could have a sustained deflationary effect, as already observed in global goods prices. And finally, but not least, we are going through an AI revolution. Initially, this has impacted the US economy via additional CAPEX. But in the coming years, the effects of LLM/AI technology will be seen much more broadly, and we will likely entail reduced labor demand in many services industries. While this is not the focus for this week; this will eventually matter for the Fed too.