When so many experts are at odds over the larger-scale issues, it can be unsettling as an investor looking to make decisions about one’s own portfolio. In this article, we attempt to clear a path through the chaos, and separate the temporary from the substantial.
The January Meeting
While the ultimate decision to hold rates may give the impression that we are nearing the endgame in the Fed’s long battle with inflation, the reality is more complex. Fed Chairman Jerome Powell put it most succinctly when he remarked that whether the current rate is too high, too low, or neutral is ‘in the eye of the beholder’.[1]
The Fed minutes released earlier this month show the cracks have deepened since the previous meeting. Governors Waller and Miran ultimately dissented from the decision - a formerly rare exception to the “Governor Consensus” that is now becoming routine[2] - arguing that rates should be lowered. Meanwhile, other members suggested the possibility of rate hikes later in the year, should inflation remain elevated.[3]
While the overall tenor of the discussion points towards a general reluctance to cut rates[4], the core of the disagreement remains - namely, whether the risks to the labor market are higher than the risk of continued or resurgent inflation.
What Does the Data Say?
Part of the issue with interpreting the data is not so much the lack of it, but the sheer volume of competing signals.
In a speech in late February, Governor Waller went on record saying that disappointing February employment numbers would give a strong indication as to whether the economy was on a solid footing or not.[5] While January employment figures came in stronger than expected at 126,000 new jobs, February’s results showed a decline of 92,000 - presumably giving Waller his answer.[6] The latest BLS revisions further show monthly growth of just 15,000 new jobs in 2025, a minuscule figure in a country of approximately 170 million workers.[7]
Looking at inflation, the picture is also ambiguous. The January headline CPI figure (2.4%) is the lowest reading in 5 years.[8] However, Core PCE inflation remains stubbornly above target, moving from 2.9% to 3.0% in December.[9]
The Warring Camps
Each side has its own interpretation. The dove camp argues that the inflationary impact of tariffs is temporary, and that true inflation is actually lower.
It furthermore sees the rise of AI as creating ‘structural disinflation’ - keeping wage costs from rising by boosting efficiency - that allows for lower rates and higher growth at the same time.[10] While there is some research to back up this claim[11], as well as historical precedent (the 1990s and the internet), it is still early days.
The hawk camp believes that the current inflation data cannot be simply dismissed, and that AI investment could lead to economic overheating, at least in the short-term, as investment in datacenters and infrastructure booms and productivity gains fail to materialize as quickly as expected.
Indeed, leading hawk Vice Chair Barr has argued that AI could push the neutral rate (also known as r*) higher than the former range of 2.5% - 3.0%.[12]
Meanwhile, the effect of the One Big Beautiful Bill Act (OBBBA) and escalating tensions with Iran are adding to the confusion, with arguments to be made by both sides that they reinforce their respective stances.
Conclusion
The lack of consensus among experts indicates that we as investors should be wary of holding strong convictions in either direction.
One thing is clear, however: the longer-term impact of Artificial Intelligence on the workforce has the potential not just to influence monetary policy, but challenge fundamental assumptions on which it is based. If technology has - in fact - decoupled output from headcount, this implies a not only a shift in how the Fed uses rates in the future, but also the structure of the economy itself.
[6] Bureau of Labor Statistics
[7] Bureau of Labor Statistics
[8] Federal Reserve Bank of St. Louis
[9] Bureau of Economic Analysis
