The Fed Rate Hike
The odds of a Fed rate hike tomorrow are extremely high if you go by market probabilities, and that is what the Fed watches. The core question going in: do supply shocks create inflation? The answer is a hesitant yes. Supply shocks raise prices on some things, and if they linger, they can creep into other parts of the economy.
The second question is whether raising interest rates to lower demand is the right move. Kevin Walsh (also spelled Warsh) must decide this, and I do not think he wants to raise rates. He is likely worried about housing, mortgage rates, car loans, credit card rates, the consumer, and small business. The market thinks otherwise. The open questions are what the FOMC does, how many members dissent, and how Walsh explains it. He has to justify his choice either way - flat rates or a hike.
At 2:30 the market gets the summary of economic projections, plus his remarks on his thinking. Pressure points toward a hike, and not a "one and done." I earlier expected one and done because the market moved higher last week, and I did not think it would rise if traders expected multiple hikes. Since then the market has moved lower, so the one-and-done view has faded, and more people now expect one hike and more.
When probabilities rise, opinions shift and people let the overall market drive their decisions. Whether that is right is unclear. The Fed gets it wrong often. It was way too late on inflation, called it transitory, and did not move fast enough when inflation spiked. Then it moved correctly. The point stands: the Fed moves, markets react, but that does not mean the move is right. Do not assume that because the Fed acts as the futures show, the action is correct. On the transitory call, it turned out not so transitory.
The AI Trade and Nvidia (NVDA)
On a podcast with President Trump calling in, Trump asked Nvidia (NVDA) CEO Jensen Huang about AI. Huang agreed with the administration's push to keep moving forward. He said panic creates a false choice between fast innovation and safety, while adding that valid organizational whistleblowers should be heard. Safety measures should be put in place, but the pace of AI should not be interrupted, and the US should not fall behind China.
The administration holds one view; Huang leans that way. Others are more cautious. Letting China win in AI is not a good choice. Sam Altman raised the same point about the AI arms race with China and how intense it is, arguing for safety and accountability at home - the fight with China does not justify recklessness here. Dario Amodei started the idea of pacing this frontier.
There is a limit to US control. The US can control itself but not everyone else. It is like pollution or climate change: if the US stays clean but the rest of the world does not, it may not matter. It is a tricky problem because we control only ourselves.
Oil and Bond Yields
Crude oil hit $104 a barrel and has pulled back to about $101, still with a triple-digit handle. It has been under upside pressure for several days because even the hope of deescalation faded - a meeting expected yesterday did not happen. Tension sits at a high level and is not coming down soon. Conditions are eerily quiet between the US, Iran, Oman, Pakistan, and others trying to intervene. Markets are waiting for a headline, a break, or agreed negotiations to change the tone. When deescalation between the US and Iran comes, markets will move violently, but the timing and the price level it starts from are unknown.
Trump said oil will drop like a brick once a deal is done, but he also suggested that will not happen until after the November elections, so the reports are mixed. High oil plus high treasury yields pressure the markets and make it hard for stocks to take off. The 10-year bond yield is at 5%, the highest since 2007. Mortgage rates are above 7%, the highest since early 2025.
Empire State Manufacturing
The Empire State Manufacturing Index measures regional manufacturing in the New York State area. Last month it jumped to 20.6. This month the forecast was around 14, and it came in at 7.6 - a positive number but a clear cooling from the prior reading.
