A Crowded Week with High Stakes…
- Fed Chair Warsh and the Federal Open Market Committee announce their latest interest rate decision today, Wednesday, at noon with expectations being that no action will be taken, leaving the federal funds target range at 3.75%–4.00%. The bigger question is what comes next. Only the December meeting remains on the calendar, and markets now expect a rate increase to occur at this year-end gathering. Investors should pay less attention to Wednesday’s decision and more to Chair Warsh’s tone in the following press conference. Any hint that a December increase is no longer in play will wreak havoc on bond yields and rate-sensitive stocks.
- Thursday brings the release of the September Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation gauge. Forecasts call for headline inflation in the upper 3% range and the core rate in the low 3% range, both far above the Fed’s 2% target. Put simply, inflation is not cooperating which leaves the Fed little room to ease rates. A hotter-than-expected inflation reading would make almost certain a December hike while sharply increasing the likelihood of early 2027 hikes as well. Owners of long-term bonds and richly valued growth stocks should prepare themselves for potential turbulence.
- The A.I. buildout remains the dominant economic force with the dollar amounts continuing to grow. Anthropic, the company behind Claude, has filed to start selling its shares publicly by early next week at a reported valuation of $1.5-$2.0 trillion – on par with the mind-bending IPO of SpaceX earlier this past summer. Meanwhile, Meta earlier this week raised more than $90 billion by both selling common and preferred stock. The company’s move showed a marked shift from other hyperscalers enormous use of debt by diluting existing stockholder’s ownership interest rather than continuing to leverage the company with further debt obligations.
- Meanwhile, the potential and impending costs of the AI boom are also becoming clearer. The enormously profitable Microsoft just announced a voluntary buyout program for as many as 25% of its workforce which equates to 60,000 employees to keep funding its AI aspirations. Voluntary programs today could become involuntary tomorrow, and Microsoft’s move is unlikely to be the last. As the bill for A.I. comes due, companies will have to find savings elsewhere, and payroll is a very ready place to look. The key takeaway for investors is that the A.I. race will be enormously expensive, and the ultimate winners are likely to be the companies that can successfully navigate the difficult trade-offs required to invest aggressively in A.I. while maintaining the strength and profitability of their existing businesses today.