by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our take on the latest FOMC meeting and the shift away from forward guidance. We then examine the ongoing debate concerning open versus closed AI, followed by a brief update on the Iran conflict, central bank gold buying, and the Bank of England’s rate decision. As always, we conclude with a review of recent domestic and international economic data.

Fed Family Fight? At its latest meeting, the FOMC held interest rates steady at a target range of 3.5%–3.75%, though the decision was not unanimous. Three Fed officials dissented, advocating instead for a rate hike. This reluctance to tighten policy comes as market patience with Fed Chair Kevin Warsh wears thin, with investors increasingly questioning the central bank’s commitment to its 2% inflation target. Consequently, markets are beginning to price in a less responsive Federal Reserve.

• The FOMC’s decision to hold rates steady comes as Fed officials maintain a patient stance on inflation, particularly given ongoing conflicts in the Middle East. In its post-meeting statement, the Fed reaffirmed that Middle East tensions remain a source of economic uncertainty, even as the economy and job market stay solid. The only notable revision was to its balance sheet strategy, shifting from language stating it is “reaffirming” its approach to instead stating that it “is continuing” its policy of maintaining ample reserves in the banking system.
• During the press conference, the Fed chair said the central bank continues to be committed to its objectives, but offered little clarity beyond that. He began by framing the discussion around several questions raised during the two-day meeting: whether the past really is past, whether shocks affect output or employment, whether capex spending feeds into inflation, and whether the balance sheet is still providing policy accommodation. He did not provide any clear answers.
• Additionally, Warsh seemed to double down on moving away from forward guidance. He suggested that while the market is functioning as intended, the Fed will not be bound by market expectations. He specifically cited rising bond yields as evidence that the market is reacting to data and setting rate expectations independently rather than waiting on the Fed. However, when pressed about market expectations for higher rates, he reiterated that these forecasts will not dictate Fed policy.
• Following the meeting, markets seemed to grow uneasy that the Fed was not treating its price-stability mandate with sufficient seriousness. In response, the 30-year US Treasury sold off and the dollar softened after the speech. That said, we see these moves as potentially short-lived, as the three dissents still suggest that a rate hike remains firmly on the table for the next meeting. If incoming data improves over the coming weeks, the market reaction could prove temporary.

Open vs. Closed AI: Major tech companies are pushing back against sweeping AI regulatory changes, as national security concerns intensify both domestically and abroad. On Wednesday, Meta CEO Mark Zuckerberg voiced support for more open-source AI, arguing that it could make the technology more widely accessible. His remarks come amid growing unease that increased centralization and tighter restrictions could stifle innovation and raise broader questions about the appropriate use of AI.

• AI systems fall into three categories: open source, open weight, and closed source. Open-source AI makes the code and, in some cases, training data available for anyone to use, modify, and share; open-weight models make the trained parameters publicly available but may still keep the code and architecture proprietary; and closed-source systems, such as those from Anthropic and OpenAI, keep the underlying code private and offer limited customization.
• The drive for more open-source AI comes as companies grow increasingly worried that closed platforms lack the same level of flexibility as their open counterparts. Much of this unease stems from industry players who do not want to be constrained by the rigid guardrails and safety protocols inherent in proprietary systems. Last week’s hacking of Hugging Face, a prominent AI company, by a rogue AI agent underscored these concerns. The breach could not be immediately remedied by Anthropic’s or OpenAI’s models, forcing the company’s operators to turn to open-source Chinese models.
• The push for AI is reshaping how the United States competes in the global AI race. While China has made open AI a central feature of its strategy, the US is still debating its own path forward. Proponents of closed systems argue that AI remains too dangerous to make openly available to the public, while advocates of open-weight models contend that broader accessibility would not only accelerate technological growth but also lower barriers for new businesses to enter the space.
• If the US continues to favor closed-source models, development could slow, leaving it vulnerable to pressure from Chinese competitors. On the other hand, shifting toward open-source or open-weight models could hurt the profitability of AI companies like OpenAI and Anthropic, both of which are reportedly eyeing IPOs. While this debate is unlikely to affect AI momentum in the short term, it could shape the industry’s trajectory going forward.

US Strikes Back: The US responded to Iranian attacks on Wednesday, retaliating for a surprise strike on American airbases the day prior. The response follows earlier Iranian attacks on US allies in the Middle East, including Jordan, Kuwait, Bahrain, Qatar, and Oman, as well as strikes on shipping in the Strait of Hormuz. In turn, the US has targeted Iran and is coordinating with Saudi Arabia to go after Iranian forces and their proxies in Iraq. The latest attacks suggest that the conflict may be broadening across the region.

Central Bank Gold: There were downward revisions to estimated central bank gold purchases in the first half of the year. The slowdown appears to reflect, in part, the conflict involving Iran, which led some central banks to reduce gold holdings to offset lost revenue from weaker oil sales. There is also a possibility that central banks became more price sensitive, particularly early in the year. The pullback removes an important source of support for gold.

BOE Pause: The Bank of England voted to keep its benchmark rate steady amid ongoing tensions in the Middle East. The vote was 6-3, with the three dissenters favoring a quarter-point increase. Officials left rates unchanged, appearing more apprehensive about GDP slowing faster than expected than about the inflation outlook. The decision underscores the pressure central banks face as they try to bring inflation down while still supporting growth.

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