This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. President Donald Trump lashed out at Fed chair Jay Powell yesterday after Powell emphasised the risks posed by tariffs in a speech on Wednesday. Before Trump, it would have been unusual, and even alarming, for a president to openly rail against the Fed chair. But the market seems to be well prepared for such skirmishes: the S&P 500 was flat yesterday, and yields on the 10-year Treasury only ticked up 5 basis points. Unhedged will be off for Easter Monday, but back in your inboxes on Tuesday. Email me: [email protected]. AI adoptionBig Tech has had a rough year: the Magnificent 7 stocks are down 22 per cent, and semiconductor stocks have taken a beating. With the exception of the January wobble caused by Chinese AI upstart DeepSeek, this seems to be more about market volatility than dents in the AI narrative. Still, the threat of slowing adoption is worth watching. Sam Tombs at Pantheon Macroeconomics points out that according to the recent regional surveys from the Federal Reserve, services businesses expect to dial back on IT and capital expenditure, having already cut spending in prior months (chart from Tombs; the capex intentions trend is expressed as an average of standard deviations relative to its 2015-2024 mean):The most plausible justification for this is fear of slower economic growth. Most companies have not found a use case for AI yet, and the best models (ChatGPT, Gemini) have free versions. If you are the IT manager at a medium-sized company, with a potential recession looming, do you really want to approve a big AI line item?Another explanation is that this could just be the new technology lifecycle in action. Other historical tech adoptions have also had moments of market underperformance and lower uptake, says Joseph Davis, chief economist at Vanguard and author of an upcoming book about tech cycles: It’s not always a straight line — there are hiccups along the way . . . In every cycle, the tech sector underperforms for a significant period. [The] market underestimates new entrants, while [companies] ask: why are we putting money on this tech stack when we can go on cheaper tech stack in the future? We saw this with electricity [and other technologies].Then there’s DeepSeek. The Chinese company’s low-cost models demonstrated that end users do not necessarily need the best in class, and cheaper offerings may come from smaller players in the not-distant future. That could justify going more slowly on capex and adoption spending now.Even with falling expectations, many analysts see this as just momentary turbulence, and expect high adoption going forward. Here’s Joseph Briggs at Goldman Sachs:The real need of AI-related capex from an end user perspective is still seven years off. Just 7 per cent of companies currently report that they are using AI for the regular production of goods and services. While we have seen a pullback in capex expectations more broadly, I would think about this as being separate from the A theme, but rather related to a near-term headwind to investment related to trade policy uncertainty.Goldman still forecasts $300bn in AI-related investments by the end of 2025. But, as Briggs told me, that number is based on AI-exposed companies’ revenue forecast revisions. As the outlook worsens, AI spending will probably drop, too. The AI narrative is not dead. The market and business pullbacks look like an example of the familiar non-linearity of growth in new technologies. But if the US enters a multi-quarter recession — and AI customers really start to cool their jets — that could change.Friday interview: Brent NeimanBrent Neiman is a professor at the University of Chicago Booth School of Business and recently served as the assistant secretary for international finance in the US Treasury department. Earlier this month, he made headlines when the White House’s ‘reciprocal tariff calculations misleadingly cited research done by Neiman and his colleagues. Unhedged spoke with him about that calculation, the price effects of tariffs and the future of the dollar.Unhedged: Could you walk us through the research cited by the White House?Neiman: The paper was written to measure the pass-through of the first Trump administration’s 2018 tariffs into prices. At the time, there was a lot of discussion of how much foreign countries would pay for the tariffs, rather than the US. Theoretically, there’s nothing incoherent about that — it was possible that foreign exporters would reduce their prices to offset any imposed tariff. But it was also possible that there’d be very little change in pricing, forcing US importers or consumers to cover the tariff.We decided to do an empirical analysis on this question, using data meant to represent the full basket of US imports. We found that US importers paid around 95 per cent of the 2018-19 tariff. For example, if there were a 20 per cent tariff, there would be a one percentage point reduction in the price charged by foreign exporters, and a 19 per cent increase in the prices faced by US importers. We also looked at the price effects of Chinese retaliatory tariffs against the US. Interestingly, there was not the same effect. We found that US exporters dropped prices by more in response to China’s tariffs than Chinese exporters did in response to US tariffs. So in some sense, US exporters paid a greater share of Chinese tariffs than the Chinese exporters paid of the US tariff.Finally, we traced it through as best we could to retail prices, using information from two large US retailers. Our research showed that pass-through was actually much lower for the retailers. One of the reasons may have been tariff front-running by retailers and suppliers, or because there was a shift in supply away from China’s goods towards countries without US tariffs placed upon them.Unhedged: We would love to get to the implications of that, but first we want to ask more about how the White House used your research. What did they use? What did they get right, and what did they get wrong?Neiman: At a high level, I think the most important thing that they got wrong is to base trade policy around the goal of eliminating bilateral trade deficits. If you look in the numerator of their tariff formula, it’s a measure of bilateral trade imbalances. There are many reasons why bilateral trade imbalances could arise — different levels of development, or comparative advantage, or any number of other factors — that have nothing to do with “unfair” practices.Our research seems to have shown up in their calculation of tariff pass-through. The wording that the White House used was they needed the pass-through of tariffs into import prices to make their equation; elsewhere they described it as the “elasticity of import prices to tariffs”. In their methodology, they cite our paper close to that part of the equation. But then the actual number in their formula is 25 per cent, which is much lower than the 95 per cent pass-through we found.Unhedged: What do you imagine the price flow-through will be this time around? Neiman: I think there are some changes that will result in a higher pass-through. There is so much uncertainty, as you know, but there will likely be less scope for substitutes. For example, Vietnam was initially hit with a very high tariff rate. While that is lower now, that suggests that it will be less feasible for our sourcing to shift from China to its neighbours.In our original paper, we also speculated that there were broad expectations that the trade war would not last long, giving businesses the ability to build inventories before tariffs took effect. That may have played a role in restraining price increases in 2018. But that seems less likely to hold now.Also, the scale of these tariffs is off the charts, at least with respect to China. That will be salient to consumers and every pricing manager in the country. Research suggests that the salience of a cost shock really matters. So in this case, I think that it might be easier for firms to justify price increases, since everyone knows what’s going on. It also might be something that firms have to absorb given the scale. If there’s a small tariff, you might expect some margin compression; this is such a big tariff, it’s hard to imagine that margin adjustment could cover very much of it.Finally, coming out of Covid, we saw that there were all sorts of shortages, often from non-linear bottleneck effects, where key components were missing. This led to cost increases. These tariffs are so broad and they’ve been deployed with such speed that something like that could occur again.Unhedged: We’ve started seeing some concern in the market that the new tariff regime will result in foreign purchasers turning away from the dollar. You’ve done a lot of research on the dollar; could you share your thoughts on its future?Neiman: I think it’s helpful to take an expansive view on the role of the dollar. The dollar is disproportionately used in foreign reserves, import and export invoicing, to denominate external bonds, and in foreign exchange trading, among other uses. There are strong network effects between these uses. So I think it’s reasonable to be cautious in expecting anything to change too rapidly in terms of the dollar’s role. There is a concern that, with the recent volatility and uncertainty around trade policy, the US more broadly may be viewed as less dependable. I do worry that that could lead foreign investors, and the counterparts in all of these roles of the dollar, to choose other assets over dollar-denominated assets. But we need to be humble. There’s basically only one historical data point that we have on a rapid shift away from the world’s dominant currency, and that’s the transition from the pound to the dollar. We have conjectured that the dollar’s prevalence is due to strong rule of law, or deep in liquid markets and sound institutions. But we just don’t have many observations to look at.Unhedged: One of the benefits of having the Treasury be the reserve asset of the world is it results in lower Treasury yields. How will the trade war affect the debt outlook?Neiman: One of the ways the trade war will impact US debt dynamics is even simpler than questions around dollar dominance. Tariffs are likely to have a very negative impact for US growth. At the end of 2024, economically speaking, we were in a really strong position: growth and productivity numbers looked great, unemployment was very low. We have now seen sell-side research economists at Goldman Sachs and other banks say that the recession risks are nearly 50 per cent, or even above that. Slower growth has implications for the size of the US debt relative to GDP.Unhedged: What else is on your mind at this moment?Neiman: I think one thing that is really important is the foreign policy implications from tariffs. I’m an economist, so I’m generally focused on the economic impact of these policies. But in this case, I think the damage may be even worse in terms of our foreign policy and global standing. I just spent three years in the Biden administration. In my role, there was a real diplomatic component to the job. I spent a lot of time working with foreign countries on all sorts of non-economic issues, like working with poorer countries to fight the financing of drug trafficking, terrorism and financial fraud, or to stem migration flows to the US. I look at the many countries that we’re now tariffing, and I worry it will keep them from working with us, or doing so as enthusiastically, on these critical issues.CorrectionI incorrectly described the non-model approach to calculating the term premium yesterday, though the numbers and graphs are still correct. The approach involves the yield on three-year one-month overnight index swaps — not inflation swaps, as I wrote — which is more accurately described as a risk-free asset related to expectations for the Fed, not inflation. Subtracting that series from the 10-year to 10-year forward rate gives the measure. My apologies.One good readClass credit.FT Unhedged podcastCan’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.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More
