After eight years leading the Federal Reserve, Jerome Powell passed the torch in May to President Donald Trump’s Senate-confirmed Chairman Kevin Warsh. Tasked with taming inflation and staying in line with the executive’s wishes to not raise rates, Warsh ushered in a new era of limited communication and the omission of forward guidance in the hope that clearer market signals will help him deliver price stability.
By and large, investors and Fed-watchers alike have rebuffed the idea that the central bank doesn’t need to clarify its reaction function. Rather, they argue more transparency is needed, not less. “Credibility erodes when central banks announce goals without a strategy to achieve them,” Andersen Institute Editor in Chief Craig Torres writes in an edition of the Arc Blog. The Fed and central banks worldwide are undergoing a stress test amid sticky inflation, global supply shocks and changing world powers.
Central banks must become more nimble and respond faster to shocks, our colleague Fabio Natalucci points out here, or risk becoming a threat to the stability of the global financial system. So far, the Fed’s latest rate hike is in line with a Fed policy committee that’s playing a more active role. However, as the AI spending boom competes for capital and long-term yields hit multi-year highs, the harder question is whether the two-decade era of low interest rates is over for good.
AI’s Bill Comes Due
Even as memory-chip earnings prove more durable than past cycles, as our colleague Daisoon Kim notes, investors are scrutinizing the AI buildout’s finances further up the chain. Hyperscalers including Alphabet, Meta, Amazon and Microsoft are increasingly issuing debt to fund the AI boom, a shift from funding it out of earnings alone. For the first time since going public in 2004, Alphabet printed negative second-quarter free cash flow of minus $5.86 billion.
It’s a big bet with over a trillion dollars in AI-related investment expected to be made just during 2026 and over $7 trillion estimated in capital outlays needed by the end of the decade, according to McKinsey. And not everyone’s on board. In conversations with Andersen Managing Director Ken Rosen for the Global Rewire podcast, Ken expresses deep skepticism of a positive return on the data-center buildout, linking today’s mania to the late 1990s dot-com boom that ended in a bust.
Chokepoints & Power
All of this comes at a time when Washington is playing an ever-larger role in markets. The thread running through our work this year is that economic leverage, not just supply and demand, increasingly determines prices and returns.
Our flagship white paper, “Chips & Tokens at the Fault Lines,” looks at the growing economic interdependence between the U.S. and China. Both countries control critical chokepoints in AI and finance that the other can’t easily replace, requiring some form of cooperation or risking mutually assured economic destruction.
The power of chokepoint control is visible to all right now. As my colleagues Daisoon Kim, Fabio Natalucci and Alessandro Rebucci write, the disruption around the Strait of Hormuz showed how quickly a geopolitical shock can travel through global markets and ultimately show up in something as tangible as U.S. jet-fuel prices.
Governments are responding in kind. In “The Government Owns Some of the Same Stocks You Do,” we look at Washington’s growing habit of taking equity stakes in what it defines as strategic companies. Once the government is a shareholder, investors who own the same stocks are exposed to political decisions as well as market ones.
Stablecoins grow up under stress
A year after the GENIUS Act, our work asks whether the rules help stablecoins or protect banks. Charles Calomiris argues that the law and the OCC’s proposals tilt the field toward banks. Rashad Ahmed finds the OCC’s liquidity rules could push issuers’ cash into big banks at the expense of community lenders. Meanwhile, “Mapping Stablecoin Supply” shows that stablecoins are still used mostly as cash for crypto trading.
Q3 Publications
Global Rewire Podcast
09.22 – The Post-Trump World with Viviana Mazza
09.09 – The Global Yield Spike with Guy Debelle
09.03 – The Great Sell-Off with Nathan Sheets
08.25 – A Few Macro Missteps with Jill Cetina
08.18 – The Fed’s Credibility Test with Julia Coronado
07.30 – FOMC After Party with Jim Clouse & Charles Calomiris
07.14 – The Illusion of Abundance with Jeff Currie & Jason Thomas
07.07 – Choke Points and Cheap Tech with Matteo Maggiori
06.30 – The Middle Power Play with Axel Christiansen
06.16 – Sky-High Uncertainty with Ken Rosen
06.02 – Europe’s Existential Pivot with Jeanna Smialek
Media Appearances
09.28 – Banking History and the Future of Policy: Charles Calomiris at Mississippi State
08.05 – The Fed’s Independence, Failures in Bank Regulation and Supervision and How to Fix Them
05.28 – MNI: Fed Should Move To Neutral Bias Soon
The Arc Blog
09.28 – The U.K. has a Budget Problem. It Can’t Tax Its Way Out.
09.17 – How a Container Ship from Busan Exposed the Arctic’s Power Politics
09.02 – The Hidden Lesson in the History of the Lucas Critique
08.26 – Europe’s Auto Sector Welcomes China Capital and Risks Washington Backlash
08.06 – Ending the Boom-Bust Memory Chip Cycle
08.05 – The Government Owns Some of the Same Stocks You Do. Here is Why That Is Risky
07.31 – Warsh’s Fed is Failing to Stick to Its Own Principles for Good Monetary Policy
07.23 – America’s Fertility Bust Is Coming for Your Bonds
07.20 – The Hidden Choices Behind Emerging-Market ETFs
07.10 – Warsh’s Ambiguity Could Raise a Lawmaker Backlash
07.01 – Bobby Bonilla’s Cautionary Tale
06.30 – Three Myths About the American Revolution You Might Still Believe
06.23 – What Walks Out the Door: AI and the Race to Own Human Capital
06.22 – An Era of Weaponized Interdependence Begins
06.16 – Central Banks Must Change How They Talk and Act Amid Constant Supply Shocks
06.15 – AI Needs to Free Human Work and Not Just Replace It
06.10 – Why the Billionaire Wealth Tax Is Not the Right Answer for California’s Fiscal Problems
06.04 – Six-Month Earnings Reporting Could Have More Costs Than Savings for Large Companies
06.03 – AI Financial Advisors are Blind to Market Opportunity
06.01 – Wanted: A Reasonable Stablecoin Referee
Notes
09.08 – Mapping Stablecoin Supply: Coins, Blockchains, and Venues
09.03 – When History Rhymes: The Warsh-Martin Connection
08.27 – Who Owns the Car? The Connected Vehicles Rule and Discretionary Market Access
08.13 – Reserve Demand Under the Microscope: Eight Basic Facts and Two Key Questions
06.18 – Why America Fought a Revolution
06.09 – Measuring the Costs of the U.S.-China Trade War of 2022-2025
06.03 – Unintended Consequences of the OCC’s Stablecoin Liquidity Rules
06.03 – Monetary Policy Strategy for Poets: The Case of Uncertain Inflation Persistence
Business Insights
06.15 – Regional Conflict in the Gulf and the Global Capital Realignment
White Papers
06.09 – Chips & Tokens at the Fault Lines: Two Stacks in One Fragmenting World
Working Papers
09.03 – Parental Leave Policies, Fertility, and Labor Supply
08.04 – Choosing To Fail: Managerial Liability, Risk Management and Voluntary Exits of Banks
Externally Published
08.28 – Greece Takes on Corruption
08.27 – SUERF Policy Note 416: Chips & Tokens at the Fault Lines
07.27 – A nascent international financial channel of China’s monetary policy transmission
