by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with a look at a possible pivot in US foreign policy. We then analyze the latest comments from Federal Reserve officials regarding the future path of interest rates. Additional topics include more investment news from the Stargate initiative, the president’s brief encounter with Brazilian President Lula da Silva, and the growing possibility of a government shutdown. We also provide a summary of key recent global and domestic economic indicators.

Foreign Policy Pivot? The president has now opened the door for greater support for Ukraine by arguing that he believes the country can win back all the territory it lost to Russia. His comments represent a significant shift in attitude as he had previously suggested that Ukraine “does not have cards” and should be willing to make concessions for a peace deal. This new, more confrontational stance toward Moscow may signal a change in Washington’s foreign policy approach.

• The White House’s new stance is likely a response to Moscow’s recent attempts to breach NATO territory. Over the last few weeks, Russian drones have been sighted in Romania, Poland, and Estonia, in what appears to be a test of NATO’s resolve and willingness to defend those territories. The president has expressed his frustration with these incursions, stating that NATO should down them.
• Reflecting the shift in the president’s tone, Secretary of State Marco Rubio has also affirmed that the US is prepared to defend “every inch of NATO territory.” These statements, which follow calls from NATO for a more robust response to Russian incursions, suggest that the US is now aligning its policy more closely with its military allies.
• While we remain confident that the White House ultimately prefers peace, we have observed a distinct hawkish shift in both its foreign policy rhetoric and actions in recent weeks. Key indicators include the symbolic renaming of the Department of Defense to the Department of War, the push to reposition troops near Chinese nuclear facilities in Afghanistan, and the recent attacks on Venezuelan vessels suspected of drug trafficking.
• The president’s increasingly hardened stance toward Moscow may primarily be a tactical maneuver to compel Russia to negotiate a peace settlement. However, this shift also serves as a broader signal to international actors that the United States is prepared to confront aggression. While we assess that the probability of direct conflict remains relatively low, it is likely higher than what is currently reflected in market valuations.

Fed Speaks: Following the Fed’s first interest rate cut in a year, Chair Jerome Powell underscored a flexible approach to future monetary policy. Speaking to business leaders in Providence, Rhode Island, Powell described rates as “modestly restrictive” and stated that balancing near-term inflation risks with potential threats to employment presents a “no-risk-free path.” His nuanced view on labor market risks is likely to fuel speculation that the central bank remains undecided on its future monetary policy direction.

• His comments highlighted the deep divisions within the Fed, a sentiment already suspected by investors after last month’s meeting. The committee’s “dots plot” revealed an almost even split between members who favor one or fewer rate cuts this year and those who anticipate at least two.
• This internal debate has become public in recent speeches. For example, Chicago Fed President Austan Goolsbee has explicitly stressed the need for inflation to return to the 2% target. In contrast, Fed Governor Michelle Bowman argues that the central bank was late in addressing labor market imbalances, urging for swift rate cuts.
• A senior White House official and current Federal Reserve governor, Stephen Miran, has also entered the debate. He argues that the administration’s policies — specifically on deregulation, immigration, and tariffs — are fundamentally reshaping the economic landscape. According to Miran, these changes are lowering the neutral rate, therefore paving the way for as much as 200 basis points of interest rate cuts from current levels.
• Fed officials are likely to remain data-dependent, and their lack of a clear policy direction highlights this. Chair Powell’s view that policy is “modestly restrictive” hints at a preference for lowering rates. However, more aggressive rate cuts will require evidence of a cooling labor market, while signs of persistent inflation could force rates to remain on hold.

GPS Jamming: A growing number of European flights are experiencing attacks on their GPS systems. Most recently, a Spanish military plane traveling to Lithuania faced interference. Although the attack was ultimately blocked, it marks another incident of GPS tampering. A few weeks ago, a plane carrying European Parliament President Ursula von der Leyen experienced a similar situation. This pattern of interference, likely originating from Russia, signals a potential ambition to broaden the conflict beyond Ukraine.

Stargate Data Centers: OpenAI, SoftBank, and Oracle have announced plans to develop five new data centers for the “Stargate” project, an initiative being pursued in collaboration with the US government. This move is part of a broader effort by major tech firms to build out AI infrastructure, aimed at ensuring the United States maintains its technological edge. Such significant investment spending reinforces the narrative that has buoyed AI stocks and continues to provide underlying support for the economy.

Trump Meets Lula: In a bid to resolve their differences, the presidents of the US and Brazil adopted a conciliatory tone during a meeting at the UN’s annual gathering in New York. The exchange came after Brazilian President Lula, who had taken subtle jabs at the US president earlier in the day, had a brief, impromptu conversation with him and subsequently requested a more formal meeting. The conversation helped boost demand for financial assets in Brazil.

Government Shutdown: The risk of a government shutdown has intensified in recent days as the president has yet to meet with Democratic leaders to negotiate a budget deal. The primary point of contention is healthcare funding, which faces significant cuts in the proposed Republican budget. While the president has not entirely ruled out a meeting, he has stated he will not be bullied into accepting demands he opposes. Complicating the situation for Republicans is that they will need the support of at least seven Democratic senators to pass the bill.

AI Global Push: Technology equities worldwide are receiving a boost as countries embrace the AI revolution. In China, Alibaba’s plans for new spending have helped lift the stock, while stronger-than-expected performance from Micron Technologies has bolstered sentiment for domestic tech stocks. We believe tech stocks will maintain their momentum for the foreseeable future. However, as expectations grow, so does the risk of disappointment if goals aren’t met. As a result, we think it remains prudent for investors to maintain exposure to other sectors as well.

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