This week's market headlines blared earnings season cheer, a historic intervention to prop up Japan's yen, and the ebb and flow of the Iran war. But strategists looking beyond the noise are tracking deeper shifts: AI job destruction, Kevin Warsh's Fed task forces, and how inflation differs for the rich and poor.
While everyone marvels at the scale of the AI investment frenzy this earnings season, its flipside is also under the microscope. One big concern is how fast generative AI and a blizzard of sector-specific applications will displace workers rather than simply assist them. Relatively low U.S. unemployment and weekly jobless claims suggest that's not a major factor yet.
But Wall Street bank Morgan Stanley has devised a way to keep tabs on the trend via its "AI disruption tracker," which sifts through data on AI adoption, company briefings, employment surveys, and raw jobs data. Its conclusion: the impact is small but increasingly visible. In the first half of this year, unemployment continued to rise in occupations with high AI exposure, while jobless rates in low- and medium-exposure occupations largely stabilized.
"After adjusting for differences in cyclical behavior, unemployment in highly exposed occupations now runs roughly 0.5 percentage point above what aggregate labor-market conditions would normally predict, compared with approximately 0.3 pp at the time of our previous report (in April)," the bank's strategists wrote.
With the Federal Reserve's next meeting more than six weeks away, this month's annual Fed symposium in Jackson Hole, Wyoming, will grab the spotlight. Investors are eager for clues on how new Chair Kevin Warsh's task forces on Fed reform will pan out. These five study groups will look at the central bank's communications, balance sheet policy, data analysis, productivity, and inflation frameworks.
A host of prominent economists and former policymakers will join them, including former Reserve Bank of India Governor Raghuram Rajan, former Bank of England Governor Mervyn King, and former Central Bank of Brazil Governor Arminio Fraga.
But one name among the luminaries catches the eye: former Bank for International Settlements (BIS) chief economist William White. White is widely credited with warning of the 2007-2008 banking crash, opens new tab, stressing to central bankers that overly lax monetary policy was hopelessly inadequate to rein in the speculative mortgage and credit bubbles that eventually brought the global economy to its knees.
Simply meeting targets of 2% missed the bigger issue of broader monetary stability, he argued, and speculative asset behaviour was as much a factor for central banks to consider.
White, who left the BIS in 2008 after 14 years and has been involved with numerous advisory bodies ever since, was a staunch critic of former Fed Chair Alan Greenspan's view that central banks could do nothing about the formation of asset bubbles. At Jackson Hole in 2003, White urged a reluctant Greenspan to lean into credit bubbles by raising interest rates early and forcing banks to boost their capital buffers.
A Cassandra of his day, White wasn't heeded, and the rest is history. He now joins Warsh's inflation frameworks task force. The Canadian economist is just one voice of course, but it will be fascinating to get his view on the Fed's current interest rate models at a time of spectacular asset speculation fuelled by the tech and AI frenzy.
It's long been assumed that poorer households bear the brunt of inflation spikes, most obviously because spending on food and energy and essentials takes up a larger share of their budgets than for wealthier households.
But during the 2021-2023 inflation spike, it was clear that the cheaper versions in a product line saw much greater inflation.
A new NBER working paper by Kunal Sangani, opens new tab on "Cheapflation Cycles" digs deeper to explain the phenomenon. Using NielsenIQ retail scanner data, Sangani found that producers tended to pass on higher input costs to all products in a range equally on a dollar basis — resulting in a higher percentage rise for cheaper versions.
"Over 2021–2023, the disaggregated data show 2.4 percentage points more food-at-home price growth for the lowest-income quintile relative to the highest," he found.
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