Trump’s Critique of the Federal Reserve

In a recent statement, former President Donald Trump expressed his discontent with Federal Reserve Chair Jay Powell following Powell’s remarks on the economic threats posed by tariffs. This type of public criticism of the Fed has become more commonplace in recent years, particularly during Trump’s presidency. Despite the tension, the financial markets appeared resilient, with the S&P 500 remaining stable and 10-year Treasury yields experiencing only a minor increase.

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The State of AI Adoption

Big Tech companies have encountered significant challenges this year, with the so-called Magnificent 7 stocks declining 22%, while semiconductor shares have also struggled. Despite these downturns, some analysts believe that market volatility, rather than a fundamental shift in the AI narrative, plays a larger role.

Concerns over the pace of AI adoption are worth considering. According to Sam Tombs from Pantheon Macroeconomics, recent Federal Reserve regional surveys indicate that service businesses anticipate a reduction in IT and capital expenditures following previous spending cuts. This downturn is likely linked to fears of a slowing economic landscape, as many companies are still evaluating the practical applications for AI technology. With free versions of leading models available, budget-conscious IT managers may hesitate to invest heavily in new AI solutions.

Historically, technology adoption does not always reflect a straightforward trajectory. Joseph Davis, chief economist at Vanguard, notes that previous technological advances have shown periods of market underperformance. Companies may balk at significant investments in new tech when cheaper options may emerge, as seen in past tech cycles.

Furthermore, the entry of low-cost competitor DeepSeek reinforces the notion that businesses may delay capital expenditure in favor of more affordable alternatives from smaller companies.

Despite current headwinds, optimism remains among several analysts. Joseph Briggs of Goldman Sachs indicates that substantial AI-related capital expenditure demand from end-users is still a few years away. Presently, only 7% of companies utilize AI in regular operations. While broader capital expenditure outlooks may have declined, Briggs suggests that this is distinct from the overall perspective on AI and influenced largely by trade policy uncertainties.

Goldman anticipates a substantial $300 billion in AI investments by 2025, although this projection depends on revisions in revenue forecasts for AI-impacted companies. As overall economic outlooks sour, AI spending may also see reductions.

Interview Insights with Brent Neiman

Brent Neiman, a professor at the University of Chicago Booth School of Business, shared critical perspectives on recent tariff-related research misrepresented by the White House. As a former assistant secretary for international finance at the U.S. Treasury, Neiman’s work predominantly examined the impacts of the 2018 tariffs initiated by the Trump administration.

Neiman characterized the government’s understanding of tariff pass-through incorrectly, noting, “we found that US importers paid around 95 percent of the 2018-19 tariff.” Furthermore, his research indicated that U.S. exporters tended to respond more aggressively to Chinese tariffs than vice versa.

On the implications of current tariff calculations, Neiman criticized the focus on eliminating bilateral trade deficits. He noted that their methodology misrepresented his findings by relying on a significantly lower figure for tariff pass-through than the 95% observed in his research.

Addressing future pricing effects from tariffs, Neiman anticipates a higher pass-through ratio this time due to reduced substitute availability and the notable scale of the current tariffs, which are expected to be evident to consumers and pricing managers alike.

Concerning the dollar’s status, Neiman expressed caution about its stability amidst evolving trade policies, noting that significant shifts away from the dollar’s predominant role as a reserve currency are unlikely in the near term. However, he warned that volatility might deter foreign entities from viewing the U.S. as a reliable partner.

Ultimately, Neiman stressed that deteriorating U.S. growth prospects due to tariffs might significantly influence public debt dynamics, with recession fears rising. He highlighted the potential broader impacts on foreign policy and international relations stemming from tariff actions.

Corrections and Clarifications

A correction was issued regarding the approach described for calculating the term premium, clarifying that the method relates to the yield on three-year one-month overnight index swaps, not inflation swaps, as previously misstated.

Conclusion

The dynamics of AI adoption and tariff policy are pivotal elements in today’s economic landscape. While challenges exist, insights from experts suggest potential recovery and adaptation in the face of uncertainty. Ongoing analysis will be essential to navigate these complexities as they evolve.