Making sense of what the fed is facing ahead.

To start, this is not a fear spreading post. I and everyone else would love to not be in the situations at hand. It’s a discussion. Let me know where I am wrong, contribute in opposition, shutting it down as nonsense completely derails the point of the discussion. So today Jerome Powell stated something that really should not go unnoticed. He effectively pointed out that the exponential build out and capex on data centers is inflationary (easiest way to understand is look at Microns price demand). This particular inflation for the econ fellas is demand-pull inflation and it’s 1 side of the very dangerous picture the economy is facing. On the opposing side of this picture we have the spooky word that’s been tossed around lately, stagflation. Stagflation is tied to cost-push inflation. This is essentially when inflation is being “pushed” through the economy by the supply side. Or for this scenario we are in, when a sudden halt in production occurs so prices rise not because of demand but because of supply. The continued call to do nothing and wait; I recall Jerome saying if any conference was the time to do so it was this one. And he couldn’t be more right because it’s sort of balancing things if you step back and look at the two opposing sides. On one side you need the ai capex to show serious returns on capital and on the other side you need to avoid production slow down/halt to keep this balance going. Make sense? Well, we are still in a wait and see phase for ai capex to be pumping out the returns and while there are some signs that it is, it’s not mature enough to say for certain. And we are in a wait and see phase for the war and production output. This is really a horrible situation to be in. Certainty validates a market. And frankly it gets even worse. So what happens if production halts (Middle East exports) and we have cost-pull inflation at a time when ai capex is driving demand-pull inflation? Ai isn’t going to give everyone in our economy money to buy 10$/gallon gas aka money to survive the supply shock. (If we avoid the cost-push inflation aka the production crisis then all that is ahead is ai proving its return on capital and that can be much easier to navigate in monetary policy terms). You get stagnation, a controlled economic hibernation to make it sound fancy. This is basically a depression with government intervention so not as dark, economic preservation. And the sacrifice is: A market crash followed by years of sideways the ai bubble Ai bail out Export bans (in many countries economies) Mandated rationing, rates stay low for consumers and energy is mandated to consumers away from data centers. You cant really force rates up when production halts and you can’t really let ai continue to spend money hand over fist. A collision of demand-pull and cost-push inflation. There is genuinely a lot at stake and I hope this can help to make some sense of the temperature in the room. \*In my opinion\* a real generational hold your breath kind of moment.