What's next for Warsh's Fed; AfD's euroskeptic platform; Trump's response to Von der Leyen

As expected, the FOMC delivered a rate hike, raising the federal funds rate by a 1/4 point to between 3.75% and 4%.

The rate hike comes amid stubborn inflation, energy price gains from the longer-than-expected Iran War and a strong U.S. labor market backdrop.

Probabilities of a 25 bps hike reached 92% going into the FOMC meeting, but that's not to say there weren't arguments against a hike before then.

Goldman Sachs, for example, attributed factors such as tariffs as key drivers of PCE inflation and noted the transitory nature of their inflationary impacts.

What’s next?

The U.S. central bank has only once raised rates in a one-and-done fashion, in 1997, leading to some investors now believing there will be more hikes to come.

In fact, the newly released Summary of Economic Projections indicate at least one more rate increase this year.

But the question over how high the Fed will have to raise rates to get inflation down is an important one, especially given its impact pushing up bond yields. The 10-Year Treasury recently reached 5%, its highest level since 2007.

Warsh during the FOMC press conference offered a more sanguine take on why Treasury yields have moved higher: increased expectations for economic growth and the AI investment boom.

When investors expect a stronger economy, they may take on more risk by placing bets on higher-return assets and expect the Fed to keep rates higher. Both push Treasury prices down, which pushes yields up.

This is a fair take from Warsh. AI investments have indeed been booming, and many investors expect to see AI's potential in delivering higher productivity and GDP growth. Interestingly, this is also the first time where ZERO FOMC participants see downside risks to GDP growth since the Summary of Economic Projections started being published.

But whether AI investments can translate into economic growth – and how quickly – or whether we might see a correction is to be determined. 

Recent calls for pacing the AI buildout from the frontier labs are also worth monitoring. If they do agree on a slowdown, does that mean expectations for AI to deliver growth wanes?

AfD's euroskeptic platform and Trump's response to Von der Leyen

I've been keeping an eye out on AfD news since their win in Saxony-Anhalt.

According to the WSJ, the AfD’s agenda includes speeding up the deportation of undocumented migrants, increasing welfare benefits for native-born Germans, ending sanctions on Russia and German aid to Ukraine, and pulling the country out of the European Union.

I think their agenda to pull Germany out of the EU is ambitious, especially as Ursula Von der Leyen, in her speech to the European Parliament in Strasbourg yesterday, touted the importance of democratic relations.

Von der Leyen is President of the European Commission. But more interestingly to note here is that a she's a member of the center-right Christian Democratic Union, which 1) holds deep disagreements over democracy and foreign policy from AfD and 2) is the party that plummeted to 17.2% against AfD's 43.8% in Saxony-Anhalt. This marks the first time since World War II that a far-right party has come close to controlling a German state.

But in an Eurobarometer opinion poll, 90% of Germans support the Euro as the single currency of the monetary, presenting a constraint on the AfD's euroskeptic platform.

Speaking of constraints, Von der Leyen and Prime Minister of Canada Mark Carney face their own as they work toward an agreement that would make Canada an associate member of the EU.

I wrote in my note yesterday that President Trump's response may increase tensions. And it did, sort of.

Asked about Canada potentially becoming an associate member of the EU, Trump noted that if the partnership were formed with bad intentions, the U.S. would put "very heavy tariffs on Europe," according to the Wall Street Journal.

What counts as bad intentions?

I guess it was prudent, then, for Von Der Leyen in her address yesterday to clarify that the EU-Canada partnership “is not [one] against anyone else, but for our common strength.” 

That might lead Trump to view the partnership as one formed with good intentions, at least for now.