The U.S. remains an economic oasis and is the primary driver of worldwide economic growth. As an example, in May, U.S. surged 0.9%, while China’s declined 0.6%. China remains haunted by deflationary forces, and due to the fact that the U.S. dollar is now the strongest it has been in a year, everything we import should be getting cheaper due to weak foreign currencies.
I fully expect that U.S. growth will accelerate to over a 5% annual pace in the third quarter due to robust productivity gains, record energy exports, and resurging consumer spending. The good news is that the AI-led productivity gains are not inflationary.
Just to demonstrate further why the U.S. is a leader, during the recent G-7 meeting, European Central Bank (ECB) President Christine Lagarde said that AI can potentially lead to dangerous financial crises, and the is determined to ensure that doesn’t happen. Essentially, Lagarde was defending the EU’s Digital Services Act, and the timing of her speech was designed to taint the influence of the technology executives at the G-7.
What Lagarde said is just further evidence that Europe and the U.S. do not agree on technology and that the EU wants to continue to fine U.S. technology companies. I should add that Poland has vetoed implementing the Digital Services Act, so the EU is expected to fine Poland for rejecting its regulation. The fact that Lagarde implied that AI would trigger a financial crisis was ridiculous and without merit.
Hopefully, new Fed Chairman Kevin Warsh can educate Christine Lagarde that AI-led productivity gains are not a threat to economic growth and financial markets. I should add that Chairman Warsh’s press conference was impressive. He made it clear that the Fed is re-evaluating the economic data that the monitors.
Interestingly, Warsh talked about a task force reevaluating productivity and its impact on jobs. Additionally, Warsh talked about a task force evaluating how an inflation framework is evaluated and to dig into the real catalysts for inflation.
It is very clear that Warsh tends to use these task forces with the to change the narrative, better forecast inflation, and to monitor productivity gains that are not inflationary. It will take time for Warsh to change the Fed narrative, so he is starting on the staff level, and a new narrative may start showing up in upcoming Beige Book surveys.
I am still holding out for a Fed key interest rate cut later this year, but I am in a small minority. Warsh confirmed that the Fed’s forward guidance has been dropped, which is his first big stamp on the .