Regarding interest rates, just a note: We always hear about the absolute interest rate, as if that were the most important to investors, but it is not -- what matters most is the GAP between the interest rate on borrowed money (the Prime rate for large businesses) and the projected return on investment. Letting interest rates fall stimulates investment somewhat, but the main stimulant is a high likelihood of good profits from an investment. Recently we have been hearing news that investors in manufacturing in the United States are having a hard time making profits from investment in manufacturing, because tariffs increase the cost of equipment and raw materials, and the cost of labor in the US is high. Moreover, we are seeing increasing hesitation about investors in AI because, as a recent MIT paper points out, no one is yet making actual profits from AI, even as investment has been very large. If AI investors can't make money, they won't care much if interest rates fall 25 basis points this month or not, and AI investment has been the major factor driving the rise in the stock market since late 2022. https://www.entrepreneur.com/business-news/most-companies-saw-zero-return-on-ai-investments-study/496144#:~:text=building%20sustainable%20success.-,Companies%20are%20pouring%20billions%20of%20dollars%20into%20corporate%20AI%20projects,seeing%20%22value%22%20from%20AI.
I think the returns to AI are over stated too. Glad to hear the evidence. Too early for it to make the impact people say it will. I agree with the gap too.
Regarding interest rates, just a note: We always hear about the absolute interest rate, as if that were the most important to investors, but it is not -- what matters most is the GAP between the interest rate on borrowed money (the Prime rate for large businesses) and the projected return on investment. Letting interest rates fall stimulates investment somewhat, but the main stimulant is a high likelihood of good profits from an investment. Recently we have been hearing news that investors in manufacturing in the United States are having a hard time making profits from investment in manufacturing, because tariffs increase the cost of equipment and raw materials, and the cost of labor in the US is high. Moreover, we are seeing increasing hesitation about investors in AI because, as a recent MIT paper points out, no one is yet making actual profits from AI, even as investment has been very large. If AI investors can't make money, they won't care much if interest rates fall 25 basis points this month or not, and AI investment has been the major factor driving the rise in the stock market since late 2022. https://www.entrepreneur.com/business-news/most-companies-saw-zero-return-on-ai-investments-study/496144#:~:text=building%20sustainable%20success.-,Companies%20are%20pouring%20billions%20of%20dollars%20into%20corporate%20AI%20projects,seeing%20%22value%22%20from%20AI.
I think the returns to AI are over stated too. Glad to hear the evidence. Too early for it to make the impact people say it will. I agree with the gap too.
I suspect inflation will continue to tick upwards as the full impact of the tariff policy is still to be felt.
Given how sticky inflation is, has the Fed implicitly (tacitly?) decided that 3% is the real target?