Navigating the Fog

This week, the Fed cut rates by a quarter point but hinted that another move in December is unlikely. That subtle change in tone was enough to send the 10 year Treasury yield back above 4% as markets adjusted to the idea that the easing cycle may not be as steady as investors hoped. The Fed itself remains divided. Governor Miran favored a larger cut, while Kansas City Fed President Schmid wanted to keep rates unchanged. A split like this, where some members want to tighten and others want to ease, has only happened three times since 1990. It shows how uncertain things feel right now.

Chair Powell sounded cautious, describing how the Fed is trying to navigate limited visibility. “You know, what do you do if you’re driving in the fog? You slow down,” he said, explaining the decision to move carefully. With parts of the government still shut down and data releases delayed, Powell said the Fed is relying more on private data and conversations with business leaders. In other words, the central bank is steering by feel rather than sight.

A New Kind of Capital Cycle

Powell also made it clear that policy is still “modestly restrictive” and doing its job to keep downward pressure on inflation. But what stood out this week was his comment on artificial intelligence. He said it is different from the dotcom bubble because the companies driving this wave actually have earnings. That is an important distinction. In the late 1990s, capital was chasing ideas. Today it is chasing productivity. The money being spent on artificial intelligence is coming from profits, not borrowed cash.

You can see it in the numbers. Big technology firms like Alphabet, Meta, Microsoft, and Amazon all lifted their spending forecasts this quarter, collectively putting more than $380 billion into artificial intelligence infrastructure. That money is flowing to chip makers like Nvidia and AMD, and to companies like Broadcom that are building the backbone of data centers. It is a massive investment cycle, one that reaches beyond chips and servers. Power is now the next constraint. Data centers are consuming so much electricity that utility companies are racing to expand capacity, and new projects are being built closer to renewable sources. We have never seen corporate capital spending of this scale focused on computing power and energy at the same time.

Productivity Paradox and Labor Strains

Most economists do not see today’s artificial intelligence spending as a bubble, at least not yet. It is still below one percent of gross domestic product, which is modest compared to past infrastructure booms. The money is real, the earnings are real, and the use cases are growing fast. What is unknown is the timeline. Companies are racing to automate, but the payoff in productivity takes time to measure. Meanwhile, the early signs of displacement are already here. Amazon just announced 14,000 layoffs tied to automation and artificial intelligence integration. Other firms have not gone that far but have quietly slowed hiring. The argument that artificial intelligence helps workers instead of replacing them may be true in theory, but for now it seems to be doing both.

The tricky part is that just as companies are spending record amounts to build smarter machines and make workers more efficient, the job market is sending conflicting signals. On the one hand, massive cap-ex on AI, data-centers, chips and infrastructure suggests future productivity gains. On the other hand, new‐entrants and recent graduates are finding fewer obvious pathways into the workforce. Plenty of college grads say the entry‐level jobs that once paid their way up the ladder are harder to find, and some of the standard “graduate job” tracks are thinning.

It is not just that jobs are disappearing; entry‐level roles in certain fields are being automated or substituted before they even get reskilled. A large chunk of the recent spending by big tech isn’t directed at hiring more people at the bottom of the pyramid but at upgrading systems, automating processes, and redeploying staff. So the funnel that used to exist—college degree → entry level professional role → mid career—is under strain. At the same time those with advanced skills and who work in AI-augmented jobs will be better paid.

Conflicting Signals

So the Fed finds itself cutting rates just as companies are spending record amounts to make machines smarter and workers more efficient. Those two forces do not usually align. One is about stabilizing demand, the other is about reducing it through automation. The risk is that we get a mini-boom in capital spending followed by a pullback once returns level off. Or we get something more lasting, a new productivity wave that allows growth without inflation. No one really knows yet.

For now, markets are back to guessing. Investors who thought the Fed was on a clear path to lower rates now have to reckon with mixed signals and an economy that is still reshaping itself. The artificial intelligence story is real, but like all revolutions, it comes with growing pains. The smartest approach might be the same as Powell’s advice in the fog. Slow down, keep your hands steady, and stay focused on what is directly ahead.

Have a great weekend!

Sources

• The Fed cut rates by a quarter point; 10-year Treasury yield moved back above 4%.

• A split vote favoring tightening vs. easing has only happened three times since 1990.

• Big technology firms (Alphabet, Meta, Microsoft, Amazon) collectively invested over $380 billion in AI infrastructure this quarter.

• AI spending is currently below 1% of GDP.

• Amazon announced 14,000 layoffs tied to automation and AI integration.

Disclaimer

The information provided in this communication is for informational purposes only and does not constitute financial, investment, or legal advice. All content is based on data and sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Market conditions and economic factors are subject to rapid change. Past performance is not indicative of future results. The views expressed herein are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer, or company. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The author may hold positions in securities mentioned in this post.