Good morning. Andrew here. It’s decision day for the Fed. Will the central bank raise interest rates this afternoon? Kevin Warsh, the Fed chairman, has signaled that the central bank would need to take action if inflation is over 2 percent. But raising interest rates is not going to fully open the Strait of Hormuz, a bottleneck that is compounding the inflation problem. And then there is the issue of credibility. What does it mean for the Fed to be independent of the White House? If it doesn’t raise rates, will it be accused of being political? More below. (Was this newsletter forwarded to you? Sign up here.)
Credibility test?Calm has returned to the bond market this morning. But investors who are pushing the Fed to cool inflation and Washington to rein in spending have not been quiet. That’s heaping pressure on the central bank and its chairman, Kevin Warsh, to raise its benchmark lending rate for the first time in three years. It has also created a challenge for Treasury Secretary Scott Bessent, who in congressional testimony yesterday defended the agency’s intervention in the bond market while also endorsing President Trump’s recent election gambit: a “dividend” to American adults at a potential cost of more than $1 trillion. Analysts see today’s rate decision as a credibility test for Warsh. Futures traders expect a quarter-point increase to help bring inflation closer to the Fed’s 2 percent target. Such a move is likely to anger Trump, who has urged central bank officials to cut rates. The big question is whether Warsh, who prefers a more tight-lipped communication style, will give the market what it seeks — guidance that an increase today is not a one-and-done move. The market, and many Wall Street economists, forecast two rate hikes this year. Some analysts warn that anything less would risk more bond market turmoil.
And then there’s Bessent. His testimony yesterday before the House Financial Services Committee began just as a key borrowing rate touched a 19-year high.
Inflation and federal deficit concerns have pushed bond yields higher despite the Treasury Department’s multibillion-dollar buyback plan aimed at reversing the slump in bond prices. Bessent gave the Treasury’s bond intervention plan a passing grade nonetheless. He suggested that bond yields might have been even higher had Treasury not acted. But he gave mixed messages on fiscal spending, an issue dear to inflation hawks. Bessent again said that a belt-tightening “fiscal consolidation plan” was still in the works, but offered no further details. He also said that the agency had been working for “quite a while” on Trump’s plan to give American adults $5,000 if Republicans retain control of Congress after the midterm elections. Trump’s giveaway promise, announced at the party’s midterm convention last week in Dallas, seemed to blindside members of his party. Some worry that it could worsen the nation’s creaky finances. The latest: Bessent suggested yesterday that the dividends could happen without congressional approval. He didn’t say how they would be funded. But, he added, “I believe there are ways to do it that would not affect the deficit.” The bond market will be anxious for more detail.
The crypto industry experiences a major setback. The Senate voted to block the advancement of the Clarity Act, a business-friendly regulatory bill backed by President Trump. The legislation couldn’t overcome Democratic demands for language to prevent the president and other public officials from being able to profit from crypto; Trump generated about $1.4 billion from crypto businesses last year. Bitcoin had its biggest one-day dip in three months on the news, according to Deutsche Bank.
How much does the war in Iran cost? The Congressional Budget Office found that the fighting had cost the U.S. roughly $38 billion through Aug. 1, and significantly depleted munitions. Also, Americans have spent an additional $100 billion on fuel during the war, The Wall Street Journal reports. The political fallout is beginning to crystallize as rising prices have helped drive Democrats to a nearly 9-point advantage over Republicans in a new Times/Siena University poll. The Trump administration reportedly ordered Kalshi to stop tallying the price of A.I. spending. The Commerce Department asked the prediction market Kalshi to remove a product that tracked the price of artificial intelligence compute, citing national security concerns, according to Semafor. The department denied the report. Ed Sheeran’s stadium tour is in turmoil. Finneas and other musicians have announced that they were leaving the high-earning tour. That’s after the rapper Macklemore was ordered off the lineup by Bob Kraft, who said the rapper would not be allowed to perform at Kraft’s Boston-area Gillette Stadium because of Macklemore’s pro-Palestinian comments onstage at a previous show.
Zuckerberg and Huang vs. AnthropicCalls by leading artificial intelligence labs to slow down work on bleeding-edge models are drawing more opposition — from other tech giants. Exhibit A: Mark Zuckerberg of Meta, who wrote in a social media post that A.I. companies were capable of regulating their safety risks themselves. He wrote that his company had delayed shipping its latest A.I. model for months to focus on its safety: We didn’t call for everyone else to do this before we would. We just did it as part of our day-to-day work because it was clearly the right thing for people and for us. While Zuckerberg didn’t call out Dario Amodei of Anthropic, who set off the latest debate with a call for more government regulation, it was clear whom the post was aimed at. He specifically needled companies “racing towards recursive self-improvement” — models that can improve themselves without human intervention — which is a major goal of Anthropic and OpenAI. Exhibit B: Jensen Huang of Nvidia, who told CNBC that potential new regulations to let A.I. companies work together on safety without fear of antitrust prosecution were “completely unnecessary.” Huang also argued at Salesforce’s Dreamforce conference that safety and development speed weren’t mutually exclusive: “You could definitely have both at the same time,” he said.
Who’s afraid of Chinese A.I.?One of the biggest reasons people give for opposing an artificial intelligence slowdown is simple: If the U.S. takes its foot off the gas, China will leap ahead, threatening American national security. But many experts in the field say that the facts on the ground are more complicated. The prevailing wisdom about China: Impressive advances by Chinese labs like Moonshot AI (which makes Kimi), Alibaba (Qwen), and Z.ai (GLM) have made many in Silicon Valley and Washington nervous. These models are regularly described as roughly six months behind American leaders like Anthropic’s Claude and OpenAI’s GPT models.
But some experts say China is further behind than it seems. U.S. labs like Anthropic have criticized Chinese models by accusing them of being “distilled,” essentially trained on Western counterparts without permission. That suggests any slowdown in U.S. model development would limit Chinese A.I. work as well. China also lacks the computing power that’s available in the U.S. — it has perhaps an eighth of American capacity, one expert told Ezra Klein of Times Opinion — which effectively caps how advanced its models can get.
Expect A.I. to be a big focus of the U.S.-China summit this month, when Trump is expected to sit down with Xi Jinping, the Chinese leader. “I think that both sides are increasingly seeing that they would need to coordinate with each other,” Kyle Chan, a fellow at the Brookings Institution who studies Chinese technology and industrial policy, told DealBook’s Brian O’Keefe. “The question is, can they?”
Silicon Valley rediscovers hardwareRockets and robots are catching the attention of venture capitalists as investors seek new ways to weather disruption from artificial intelligence. The latest beneficiary of that trend is Matter Venture Partners, a Silicon Valley firm that specializes in hardware. Matter announced today that it had raised $450 million, bringing its total assets under management to $750 million, Niko Gallogly is first to report. The funding round includes investments from TSMC and ASML. A.I. has disrupted software, venture capital’s bread and butter. Market watchers have a name for this: “SaaSpocalypse.” That’s pushing more investors into hardware. In 2020, venture capital firms invested $23 billion in so-called deep tech, a category that includes robotics, semiconductors and other hardware. This year, that number has grown to $90 billion, according to PitchBook. “I couldn’t have imagined the day” when so many investors would become interested in hardware, Wen Hsieh, founding managing partner of Matter Ventures, told DealBook. Hsieh spent 17 years at Kleiner Perkins, where he focused on hardware investments. A.I. has begun to change the cost calculation on hardware. That’s partly because advanced models have reduced the cost and time of research and development. Larger companies are willing to pay up for hardware start-ups, Hsieh said. Apple, for example, acquired Matter’s portfolio company Q.ai, in January in a deal valued at $1.6 billion. It’s not the first time investors have pivoted to hardware. In the 2000s, venture capital dollars poured into clean technology companies, many of which sputtered out. The complexity of investing in hardware requires a long-term focus, Hsieh said: “If you’ve been doing it long enough, you know that it’s not easy to do.” We hope you’ve enjoyed this newsletter, which is made possible through subscriber support. Subscribe to The New York Times.
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