AI’s mixed economic signals

{"text":[[{"start":null,"text":""}],[{"start":6,"text":"Good morning. Donald Trump missed his son’s wedding on Saturday because he was busy ironing out the last details of a peace deal with Iran, which he said was “largely negotiated”. Three days later, the US has resumed attacks, Tehran is again threatening retaliation and oil prices are edging back up. European rate setters do not appear confident in a swift resolution, with two top European Central Bank policymakers — Isabel Schnabel and Philip Lane — heavily hinting they’ll be calling to raise rates in June. The die is cast — let us know how dark you think it will be: unhedged@ft.com."}],[{"start":43.1,"text":"Today, I write about AI’s impact on monetary policy, and Daire takes on the euro convergence trade."}],[{"start":50.2,"text":"AI and monetary policy: it’s complicated"}],[{"start":54.050000000000004,"text":"Kevin Warsh has famously argued that AI will create an unprecedented productivity boom that will allow the Federal Reserve to cut interest rates. But most economists are sceptical it will be the great disinflationary shock that he envisions — some believe the related capex splurge might mean the central bank has to raise rates."}],[{"start":76.4,"text":"A recent note from Simone Lenzu, a researcher at the New York Fed, goes in-depth into how AI will ultimately affect price levels and monetary policy. The short answer is: it will bring disinflationary and inflationary forces and many short-term risks."}],[{"start":91.7,"text":"On the supply side, the long-term disinflationary impact is convincing. Lenzu lays out different ways AI can help companies respond faster to cyclical shocks, which can then allow them to adjust real wages and other input prices faster than they do now. New technology to help businesses forecast and manage inventory better can help reduce marginal costs."}],[{"start":114.4,"text":"The demand side is where the outlook is more complicated. Particularly in the short term, there’s a risk of premature AI optimism before productivity and profitability gains are realised. We’re already seeing this with AI hyperscalers’ explosive capex growth, which is overwhelmingly fuelled by expectations of future productivity gains and beginning to exceed operating cash flows."}],[{"start":136.85,"text":"If this expectations-driven demand ‘responds’ more quickly than gains to productivity, the economy risks higher inflation in the short run. This complicates signals for monetary policy decisions, Lenzu says. He adds:"}],[{"start":null,"text":"

AI-driven demand news is fundamentally about future supply, but it initially manifests as demand pressure. In real time, this makes it difficult to distinguish from conventional demand overheating, particularly when measured productivity responds sluggishly due to adoption frictions, reorganisation costs, or misallocation.

"}],[{"start":150.2,"text":"With all these mixed signals, Lenzu suggests existing monetary policy measures are ill-equipped to respond to inflation and financial stability risks posed by AI. More specifically, he draws attention to a potential AI-specific stagflationary scenario. In the initial stages of AI adoption, it may be that transitional frictions depress productivity, while future expectations inflate asset valuations."}],[{"start":176.89999999999998,"text":"It’s notable that no other big central banks are sounding the “AI = rate cuts” drum, which is odd. Surely the disinflationary effects are spread globally?"}],[{"start":188.29999999999998,"text":"(Hakyung Kim)"}],[{"start":190.04999999999998,"text":"Euro convergence trade, 2026 edition"}],[{"start":193.45,"text":"One of the lesser noted themes of this year is the uptick in euro convergence chatter."}],[{"start":198.6,"text":"All EU member states are treaty-bound to eventually join the euro. So far, 21 have. That leaves six yet to do so: the Czech Republic, Denmark, Hungary, Poland, Romania and Sweden. Of these, only Denmark has a formal opt-out, just like the UK had before Brexit, although Denmark has maintained a tight peg with the euro for decades."}],[{"start":223.1,"text":"The last meaningful jump in membership came just after the global financial crisis, when four members joined in three years. Progress in the years after that stalled, which makes sense if you remember the grim details of the Eurozone debt crisis — not the best advert for euro membership in many ways. Lithuania joined in 2015 and then it took another eight years for Croatia to join in 2023."}],[{"start":247.79999999999998,"text":"The main reason for slow progress is the lack of a mechanism to force euro adoption, and that is for the best. But Bulgaria’s accession at the start of this year opened up a new eastern border for the euro. And a few of the holdouts are making warmer noises. The most notable is Hungary. Péter Magyar, the new prime minister from the Tisza party — elected in April — has made his country adopting the euro by 2030 a pillar of his commitment to closer ties with the EU."}],[{"start":null,"text":""}],[{"start":278.34999999999997,"text":"Are we seeing the start of a euro convergence trade for Budapest? Hungarian government bonds and forint, the currency, have rallied on the back of signals about closer relations with the EU and the prospect of unlocking extra bloc funding. Yields on 10-year Hungarian bonds have dropped 1.75 percentage points since late March and the forint has risen more than 6 per cent against the euro. It’s a stretch to pin this all on the prospect of euro adoption, but it’s striking that Hungarian yields are now lower than Poland’s. Deutsche Bank is advising “leaning into the Power of Tisza”, which we assume is a terrible pun on the Tower of Pisa, and buying the forint at the expense of the Polish zloty. It is keeping an eye out for more detail from the new Hungarian government on the timeline for potential euro adoption."}],[{"start":326.79999999999995,"text":"Joining would not be smooth sailing, to be sure, (the Czech Republic appears to have given up on its own efforts) and the timing is tight. Hungary has been running a fiscal deficit of as much as 7 per cent of GDP (above the convergence criteria’s 3 per cent limit) and a 78 per cent debt-to-GDP ratio at the start of this year (above the 60 per cent limit). It would also need to work towards lowering the central bank’s inflation target from 3 per cent to 2 per cent."}],[{"start":355.4,"text":"Sweden voted against Eurozone membership in a 2003 referendum, and nearly half the population still opposes it. However, opinion polls have been pointing more in favour of joining over the past few years and the finance minister and other influential policymakers have recently tried to reopen the question."}],[{"start":374.34999999999997,"text":"But in a world of geopolitical fragmentation, symbolism counts for something, and there’s a fun back-to-the-noughties vibe about euro convergence being back on the market’s radar."}],[{"start":385.45,"text":"(Daire MacFadden)"}],[{"start":387.09999999999997,"text":"One good read"}],[{"start":389.04999999999995,"text":"David vs Goliath? "}],[{"start":null,"text":"

FT Unhedged podcast

Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.

"}],[{"start":null,"text":""}],[{"start":396.15,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1780155290_3477.mp3"}