The U.S. economy is losing momentum. In February, the job market lost 92,000 jobs. The unexpected decline is fueling fears of an economic downturn. Notably, the figures for previous months were also revised downward. In December, there were actually 17,000 fewer jobs than the previously reported 48,000 new jobs. The unemployment rate rose to 4.4 percent.
Inflation: Between an oil price shock and an AI boom
Inflation is just slightly above the 2% target, at 2.4% for headline inflation and 2.5% for core inflation (February figures). That should actually ease concerns. But worries about oil prices are likely to lead to higher inflation expectations, at least in the short term.
In the long term, however, there is a countervailing force: artificial intelligence. Advances in productivity could enable companies to absorb wage increases without raising prices. This has a dampening effect on inflation.
The “Warsh Factor”: A shift in strategy is imminent
The markets are underestimating the scope for rate cuts and are almost stoically pricing in a rate cut for 2026; the probability of another cut by the end of 2026 is estimated at 10 percent. We consider this view to be purely speculative and fundamentally unsustainable. One reason is the potential new Fed chair, Kevin Warsh. He has historically been seen as an advocate of low interest rates. With him at the helm, the Fed could react more quickly and adopt a more accommodative stance. Combined with AI-driven productivity gains, we see room for significantly more rate cuts than are currently priced in.
Conclusion
Incumbent Fed Chair Jerome Powell is likely to reiterate on March 18 that monetary policy is decided “on a meeting-by-meeting basis.” The Fed will probably leave the benchmark interest rate at 3.5 to 3.75 percent. But the picture is shifting: With Kevin Warsh, a genuine paradigm shift could be on the horizon. His approach is not a blind reaction to data, but a clear economic strategy:
- Bold rate cuts at the short end to support the economy.
- Market-based rates at the long end, rather than artificial interventions.
- A consistent reduction of the Fed’s balance sheet to give the markets room to breathe again.
This presents opportunities.
Note: This text was translated using AI and may contain translation errors. The German version of the text is authoritative.