TheBRRR’s Thoughts

GM.

Things are heating up ahead of next Wednesday’s FOMC meeting and interest rate decision.

Markets have begun to price in odds of a larger-than-expected rate cut despite getting mixed signals from economic data releases this week.

Driving the move was Fed Whisperer & WSJ Journalist Nick Timiraos, who hinted at a 50bps cut in his FOMC meeting preview article yesterday.

Here’s a look at the data, followed by a breakdown of his article and other commentary on the meeting.

Consumer Price Index (CPI)

• Expected: +0.2% MoM (month-over-month), +2.5% YoY (year-over-year).

• Actual: +0.2% MoM, +2.5% YoY. Core CPI (excluding food and energy) came in slightly higher than expected, rising 0.3% MoM, driven by housing prices, despite overall inflation continuing its cooling trend​.

Producer Price Index (PPI)

• Expected: +0.1% MoM, +1.8% YoY.

• Actual: +0.2% MoM, +1.7% YoY. The slight monthly increase was driven by higher service prices, particularly guestroom rentals, while energy prices declined​

Initial Jobless Claims:

• Expected: 226,000 claims.

• Actual: 230,000 claims, indicating some softening in the labor market

Fed’s WSJ Mouthpiece Hints at Larger Rate Cut Next Week

WHAT HAPPENED:

• Nick Timiraos' WSJ article signals that the Fed is legitimately considering a larger-than-expected 50bps rate cut at its meeting next week (Sept 17-18), marking the first rate cut since 2020.

• Recent mixed economic data adds complexity: a hotter-than-expected CPI report showed persistent inflation pressures (especially in housing), but other data suggests inflation may cool in the coming months, with signs of softening in the labor market.

• Markets pricing has shifted dramatically since the article. The odds of a 50bps cut surged from 28% to 51% overnight, partially on the back of the following quote from former Fed Advisor Jon Faust:

WHY IT MATTERS:

For a 25bps Cut:

• Goldman Sachs, via analyst Paolo Schiavone, believes the Fed will likely opt for 25bps because this is the more cautious and traditional approach. A smaller cut allows the Fed to assess the impact of its move and gives flexibility for future cuts.

• Slow and steady: The Fed typically prefers to cut in smaller increments (25bps) to prevent market overreaction and maintain control over the narrative. A larger cut could signal panic or suggest the economy is in worse shape than markets currently believe, potentially spooking investors.

• The Fed may prefer to start small and ramp up the pace of cuts later, especially given the upcoming election, where stability will be a priority.

For a 50bps Cut:

• Timiraos hints that some Fed insiders, like Jon Faust and Donald Kohn, are leaning toward a 50bps cut to act as insurance against future economic deterioration.

  • Growth risks: The U.S. economy has been growing on the back of rising debt and declining personal savings, which is unsustainable. With the unemployment rate rising by 0.5% this year and the housing market softening, there are signs of potential trouble ahead. A larger cut now might help prevent further weakness.

  • Inflation peaking: Real rates are already quite restrictive, and the Fed is confident inflation will hit 2% soon. If the economy is closer to neutral on rates, logic dictates the Fed should move faster toward a more accommodative stance.

  • Aggressive response: Given the potential for economic slowdown and labor market deterioration, some Fed officials think moving quicker could be smarter risk management. Leading with a 50bps cut would signal decisiveness and prevent a situation where the Fed is seen as moving too slowly.

Goldman’s Take:

• Volatility will persist whether the Fed goes with 25bps or 50bps. The Goldman note argues that even if a larger cut is on the table, the Fed is likely to elongate the cycle—meaning they will take their time cutting rates, ensuring the economy doesn't overheat, and giving them room to adjust later.

• Best trades: Goldman advises buying credit and selling bonds, with commodities looking more attractive if growth has bottomed out. They believe equities will remain volatile, especially as markets try to digest the Fed’s messaging and potential future cuts.

CONCLUSION:

• The debate centers around how quickly the Fed should move. A 25bps cut would allow them to maintain flexibility and avoid signaling panic, while a 50bps cut would act as a hedge against a worsening economy. Markets will be on edge until the decision, and either outcome will likely result in significant volatility across asset classes, especially bonds and equities.

WSJ, ZH

OpenAI Launches o1 Models: Pushing AI to PhD-Level Reasoning

WHAT HAPPENED:

• OpenAI has introduced its new o1 model series, internally codenamed “Strawberry” (previously Q*), designed to tackle complex problems and simulate human-like reasoning.

• These models are significantly more powerful than previous iterations, achieving 83% on the International Mathematics Olympiad—a massive leap from GPT-4o's 13%.

• OpenAI claims the models reason similarly to PhD-level researchers, improving performance in fields like physics, chemistry, biology, and math.

WHY IT MATTERS:

• Real-world applications: The o1 models are set to revolutionize industries by helping with quantum optics, cell sequencing, and multistep workflows. Their ability to rethink strategies and correct errors makes them ideal for STEM fields.

• The slow rollout indicates caution from OpenAI as it tries to refine and control the tech’s impact. The early previews are available to ChatGPT Plus and Teams users, offering a taste of its capabilities.

• New Features and Use Cases: The models utilize "chain-of-thought" reasoning, making them more accurate and less prone to hallucinations compared to GPT-4o. OpenAI envisions applications in STEM, healthcare, and software development, where they can assist with tasks like coding, debugging, and annotating complex datasets​

• Pressure to deliver: OpenAI is in the spotlight, raising $6.5 billion to push its valuation to $150 billion, and aiming to prove the AI revolution is real, despite concerns about an AI bubble.

• The new "chain of thought" reasoning technique means users will experience slower, but more accurate responses, a shift from the instant answers of previous models, but with the potential for greater reliability.

Fast Company

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The BRRR is meant for informational purposes only. It is not investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.ll