Ketu Desai
By Ketu Desai
The Fed has an important meeting on December 9 & 10, 2025. Expectations on whether they cut rates or not have fluctuated wildly, and not cutting seems misguided. The Fed has increasingly grown data dependent in recent years. This meeting will decide with limited data due to the government shutdown. Data dependency has made sense in recent years. Right now, it makes more sense to be forward looking and strategic. If they are going to be data dependent, focus on the details rather than the aggregate.
The aggregate data looks fine. The Atlanta Fed GDPNow is tracking 4% growth, but that doesn’t tell the whole story. The economy is extremely bifurcated as growth is being held up by both the top-end consumer and AI data center boom. The amount the hyper-scalers spent in the last year was approximately 2/3rds of the growth in GDP which is not a sustainable or healthy way to grow the economy. Moody’s CEO sums it up, “I think there are elements of a 2-speed economy in the United States. There’s the AI economy and then there is kind of everybody else.”
The AI boom will continue through 2026 with spending expected to hit $2 trillion. The larger long-term cost of this boom is the labor market. The combination of AI and natural economic forces are responsible for continuing jobless claims, hitting their highest level in four years. Notices of mass layoffs are at their highest since 2003. Companies such as Amazon, UPS, Verizon, Merck, Novartis, Intel have all announced mass layoffs. The youth unemployment rate has reached double digits. Student loan delinquencies are at a record 14.3%. Auto delinquencies have reached their highest levels since 2010. Credit card delinquencies are the highest in 14 years. Home foreclosures are also up 20%.
The market is shouting at the Fed that major parts of the economy are weakening. Discretionary stocks such as Sweetgreen, Shake Shack, Chipotle, Norwegian Cruise, Lululemon, and Target are down anywhere from 30% to 80% YTD. AI will only make this bifurcation worse.
Cutting rates is bigger than the latest aggregate data. It’s about having a strategic view that allows the economy to grow with a solid foundation while lowering inflation. It’s about providing more certainty for businesses so that they can make decisions. Higher rates and restrictive policy are crowding out small business borrowing, especially given the funding already set aside for AI data centers.
Higher rates are preventing housing supply from hitting the market. Unfreezing the housing market will boost growth, while lowering prices through increasing supply. Housing makes up only 15-18% of the economy, but it punches above weight through a multiplier effect on all other things homeowners buy. Many major inflation drivers have lowered: housing, oil, and wages. Break-evens (a proxy for future inflation) across the curve are in the low 2% range. Prices on food and insurance won’t go down because of these higher rates. Unlocking many cyclical areas of the economy such as housing, automobiles, regional banking, consumer discretionary, small business, will allow for investment and lower inflation through an increase of goods & services supply.
We are in the midst of an AI driven productivity boom, and despite the restrictive policy AI adoption is increasing at nearly 50% among corporations. Two-thirds of S&P companies are discussing how to implement AI to drive productivity. Evidence from academic studies and company anecdotes suggest that AI is boosting labor productivity by over 26%.
We are now moving into a new phase of AI, where agents drive margin improvement at companies outside of technology. BNY’s CIO said, “We have 117 solutions [including agentic] touching everything that happens at the bank and we’re seeing really, really tangible outcomes that impact our bottom line in terms of growing capacity.” She said the company has about 100 digital employees that possess their own login credentials, email, and report to a human manager. Rocket has cut processing time of a mortgage application by 80% from 4 hours to 15 mins with AI. Bank of America’s Erica handles 2 million daily customer interactions. Public Storage has reduced labor hours by 30%. XPO has used AI to reduce empty miles by 12%, cut diversions by 80%, and improve productivity by 2.5 points.
Taco Bell is testing Voice AI for drive-thru orders. Sweetgreen has reduced labor costs by 700bps and nearly 100bps in COGS for restaurants who’ve tested AI tools. Qatar Airways made an ad completely with AI during a flight from Doha to Atlanta. Other new examples of AI implementation are popping up daily.
2026 will be about margins. S&P margins are expected to hit nearly 15% next year. This is up from under 12% when ChatGPT was introduced. Margin expansion is likely led by names outside of large cap tech, which is spending big, while the rest of the market is using AI to make operations more efficient. This will mean the AI trade broadens from the producers to the consumers.
Looking forward, the market will focus on the Fed meeting, the latest from Washington, and year-end positioning.
Ketu Desai is the Principal of i-squared Wealth Management Inc. (www.isquaredwealth.com), an investment management firm based in New Jersey. ketu@isquaredwealth.com
