One thing the Federal Reserve has in common with undefeated boxer Floyd Mayweather Jr.: they both believe the best offense is a good defense. We’re sure there’s another similarity, but we can’t think of it.

On Wednesday, the Fed continued its hawkish monetary policy and held interest rates at 5.25% to 5.5%, even as the Labor Department’s monthly inflation report showed noted improvement. Meanwhile, other central banks have already slashed interest rates or are about to. So what’s America’s big holdup?

How Low Can You Go?

Let’s start off with some good-ish news. Annual inflation eased to 3.3% in May from 3.4% the previous month, the Labor Department reported Wednesday. Core prices, which exclude volatile food and energy costs, rose just 0.2% for the month and 3.4% from a year ago, the lowest gains since 2021.

However modest, the cooling provided some optimism that the Fed will be able to cut interest rates later this year. According to prediction market Kalshi, the odds of no cuts fell to 24% from 33%, and the odds of two rate cuts spiked to 35% from 21% upon the CPI report. The first could come in September and the second may be doable by December. Sure, it’s not the six rate cuts we all thought were coming at the end of last year, but it’s something.

A twofer might be wishful thinking, though: 

• During the Fed’s meeting Wednesday, officials forecasted only one quarter-point cut in 2024. Chair Jerome Powell didn’t seem too confident in the cuts, saying the economy would see “good, but not great” inflation data for the rest of the year. 
• But in other parts of the world, the rate cut show is already on the road. The European Central Bank, the Swiss National Bank, Sweden’s Sveriges Riksbank, and the Bank of Canada have all cut interest rates this year, and the Bank of England is expected to join them in August. 

Why 2% Inflation? The Fed’s obsession with inflation targets is a relatively recent phenomenon. The 2% sweetspot only gained prominence thanks to a somewhat offhand comment made by New Zealand’s former finance minister during a TV interview in the 1980s, according to a recent Council on Foreign Relations deep dive on the target’s origins. There was validity behind the number upon further study. At 2%, central banks have just enough of a buffer to not worry about entering a state of deflation where consumers are spending less, wages are lowered, workers are laid off, and the overall economy is suffering. And if a country were to approach a recession, there’s wiggle room for rate cuts at 2% inflation. So forget what Schoolhouse Rock! says — two is a magic number.

Their own private supply chain. 

According to a Bloomberg report published on Wednesday, the Group of Seven countries — the US, Canada, France, Germany, Italy, Japan, and the United Kingdom — are forming a group that will rejigger the semiconductor supply chain and lay out new subsea internet cables. The G7’s involvement is the latest signal of the shift towards thinking of these services as a public good rather than a private product.

Why? AI Of Course.

Sales of semiconductors are soaring, buoyed by Silicon Valley’s mad rush for generative AI dominance. “The global semiconductor industry posted double-digit sales increases on a year-to-year basis during each month of 2024,” John Neuffer, CEO of the Semiconductor Industry Association (SIA), said in a statement last week, adding that April saw a month-on-month increase as well. The voracious pursuit of semiconductors has flung the value of chipmaker Nvidia’s shares into the stratosphere.

But fears of a bubble-burst are never far behind a meteoric rise, and the world has already reckoned with one semiconductor shortage. During the early days of the pandemic, the semiconductor supply chain became severely snarled, hamstringing a wide range of companies. Similarly and more recently, the vulnerabilities of subsea internet cables have been thrown into somewhat painful relief:

• In February, a cable that runs from Europe to India through the Red Sea was damaged, and going out to fix it was an even more delicate process than usual given it was situated in a warzone.
• According to a draft statement seen by Bloomberg, the new G7 group will help ensure both the security and the robustness of internet cables, suggesting world leaders are starting to fret about the security risks of dodgy cables. 

Over the past decade, Silicon Valley tech giants such as Meta, Google, Microsoft, and Amazon have become the biggest players in the subsea cable industry, bankrolling cable-laying across thousands of miles of ocean. The same set of companies will be competing for semiconductor orders, which makes for a heck of a Venn diagram.

States of Play: As the G7 divvy up their computer chips, individual countries are plowing money into domestic semiconductor companies. The Biden Administration set the tone by setting up subsidies for chipmakers worth billions of dollars. Now the German government has taken the direct investment route, funneling 228.7 million euros ($248.1 million) into a startup called Black Semiconductor, which is trying to develop next-generation chips. You know what they say, Vorsprung durch Technik.

As with MP3 players, smartphones, and tablets, Apple is arriving a little late to the AI party. But as always, it knows how to make an entrance when it does show up. At least Wall Street seems to think so.

On Wednesday, two days after Apple unveiled its wave of artificial intelligence systems across its myriad platforms, the tech giant witnessed a massive share price rally — one big enough to surpass Microsoft and become the most valuable company in the US.

Artificial Flavoring

Despite launching its first major product in years, the Apple Vision Pro headset, Apple started the year in a noted slump, with many on Wall Street fearing the Cupertino company was at risk of falling behind in the AI race. In fact, along with Tesla, Apple’s share price skid threatened to break up the so-called “Magnificent Seven” trading bloc of mega-cap firms. Chipmaker Nvidia even briefly surpassed Apple by market cap last week.

The unveiling of AI integration across its operating systems, devices, and services at Monday’s annual Worldwide Developers Conference (WWDC) — which includes a partnership with OpenAI to bring ChatGPT to iPhones — marked a major turning point in investor sentiment. Though, not quite at first:

• Apple’s share price fell nearly 2% Monday, as investors digested the event’s news, and another nearly 1% in premarket trading early Tuesday morning. Some onlookers, including Elon Musk, balked at the chance of security lapses that the ChatGPT partnership may bring.
• But sentiment has taken a complete U-turn. Across Tuesday and Wednesday, Apple shares rallied more than 10%. That’s enough for a roughly 30% rise from its April low, and big enough to briefly push its market cap to a seismic $3.3 trillion.

Big Mac: The case for investors is pretty simple, as outlined in a recent note by Bank of America analyst Wamsi Mohan. Essentially, iPhone sales had been slumping for a while now, and the new tools promised by Apple Intelligence could spur ”a multiyear upgrade cycle from faster replacement.” Ben Thompson, noted tech analyst and author of the newsletter Stratechery, sees optimism for Apple in the far-flung AI-dominated future, too, writing: “Any analysis of Apple’s prospects in an AI world should start with the assumption that AI is a complement to Apple’s business, not disruptive,” adding “AI makes high-performance hardware more relevant, not less.” In other words, advantage: Apple.