Wall Street Brunch: Will Fed's Warsh Zig When The Bond Market Wants A Zag?

Wall Street Breakfast 5.74M Followers Subscribe Summary This week’s focus is the Fed’s rate decision, with markets pricing in an 87% chance of a 25bps hike after strong inflation and payrolls data. Sticky inflation and 10-year Treasury yields near 5% are pressuring the Fed, but higher long-term yields may substitute for further rate hikes. Analysts expect a quarter-point hike, with limited appetite for an aggressive tightening cycle; a 'one and done' scenario is plausible if inflation moderates. AI industry leaders urge a slowdown in model capability advances due to existential risks, with OpenAI and Anthropic advocating for increased self-regulation. Win McNamee/Getty Images News Download this episode on Apple Podcasts / Spotify or listen below: The Fed weighs a rate hike as 10-year yields near 5%. (0:17 ) Could one hike be enough ? (1:16) AI leaders call for slowing the race toward smarter models . (2:17) This week is all about the Fed rate decision on Wednesday. Will this be the start of a new tightening cycle, a one-off hike to combat energy prices or a defiant pause? Normally, we’d look at futures and swaps to see what traders are expecting. In this case, it’s an 87% chance the FOMC hikes by a quarter point after hot August core CPI and payrolls numbers. But this week, investors need to consider whether traders are sending a message more than making a prediction. With 10-year Treasury yields ( US10Y ) close to settling at 5% for the first time since the Financial Crisis, the bond market is sending the Fed a clear signal that sticky inflation needs to be tackled. Fed Chairman Kevin Warsh has agreed that getting inflation back to the 2% target is the top priority, but he’s also argued that higher longer-term yields, rather than a fed funds rate hike, could be the way to achieve that. Warsh has also cautioned against Fed moves based on one or two data points. And there’s the White House demand for lower rates that may come into play in Warsh’s calculation. President Trump has threatened to cut off all trade with major partners if the Fed doesn’t cut. Wells Fargo economists say the run of inflation data meets the low bar to hike that Warsh laid out in his speech at Jackson Hole. We “are deeply skeptical of tighter monetary policy as an antidote to energy-induced inflation, but right now it's the Fed's world and we're just living in it,” they said. Whether it hikes or holds, the Fed will face accusations of favoring one side ahead of the midterms. But SA Analyst Samuel Smith says last week’s ECB hike gives the FOMC cover to raise . Smith expects a quarter-point hike, but “at most, it will likely only hike one more time, as there are too many countervailing factors against a fresh, aggressive rate-hiking cycle.” Wells Fargo economists say two is a good starting point for hikes, “but this could just as easily be a one and done if inflation cooperates.” “To be clear: one and done is so silly to us (it has no practical impact on anything - inflation or growth), but Warsh's calculus could be exactly that: ‘I showed them I am willing to do it, and it will have limited to no impact on growth.’ The earnings calendar is very light this week. Dave & Buster's ( PLAY ) reports Monday. Lennar ( LEN ) weighs in on Wednesday. Carnival ( CCL ) reports Thursday. In the news this weekend, AI creators are hitting the brakes as worries about rogue agents have rapidly evolved into existential alarm. Anthropic ( ANTHRO ) CEO Dario Amodei said that the progress of improving AI model capabilities should be slowed down . Over the last few months, “I have become convinced that fully addressing the risks requires even more prudence—not just investing in risk prevention, but pacing the rate of capabilities advancement so that risk prevention has time to keep up," he wrote Saturday. This comes on the heels of AI scientists assigning a better than 10% probability that AI could wipe out humanity as companies hurtle toward AGI and recursive learning. OpenAI ( OPENAI ) CEO Sam Altman then posted: "I agree with Dario that we need to pace the frontier. This has been a primary topic of discussions we've had at OpenAI in recent weeks. Committing to having independent evaluators with employee-like access is a great idea, and we will do the same." Altman also told Fortune that with current safety concerns, this year would not be a good time for OpenAI to go public . Tech analyst Dan Ives said this is an important step for the industry "around more self-regulation on the AI model pace," but "the reality is China is not slowing down anytime soon." "The pace of innovation will be a focus of the tech industry/Beltway with Sovereign AI key." And for income investors , FedEx ( FDX ) and UnitedHealth ( UNH ) go ex-dividend on Monday. FedEx pays out on Oct. 1 and UNH pays out on Sept. 22. Altria ( MO ) and Coca-Cola ( KO ) go ex-dividend Tuesday. Altria pays out on Oct. 9 and Coke pays out on Oct. 1. This article was written by Wall Street Breakfast 5.7