Fed begins cutting

This week, the Federal Reserve cut interest rates by 50 basis points, lowering the overnight rate to 4.75% to 5.00%. While the odds were 50/50 for a 25 bps versus a 50 bps cut, many economists were surprised the Fed felt the larger rate cut was appropriate. It is rare for the Federal Reserve to begin the cutting cycle with a cut greater than 25 bps, and there was 1 dissenting member on the voting committee, which has not been seen for almost 20 years. While there were differing interpretations of what a cut of this magnitude means, it is important that the cutting cycle has begun.

• Some argue this cut signals economic conditions may be worse than previously thought, but data doesn’t fully support this view
• More likely, the Fed was late to the cutting cycle and is now catching up
• Importantly, Chair Powell did say they saw longer-term interest rates higher than where they were pre-Covid
• With the 10 yr treasury (which is not set by the Fed) already down over 100 bps since Q2, the immediate impact may be more psychological
• The action of cutting interest rates in and of itself could spur economic activity, encouraging home buying (as mortgage rates come down) as well as corporate borrowing
• The biggest concern is that inflation, which remains above target, could accelerate if the economy picks up

Big tech pushes into nuclear energy

Microsoft has signed a 20-year agreement with Constellation Energy to buy nuclear energy from its previously shuttered nuclear power plant in Three Mile Island. The deal, reportedly $800 million annually, to source nuclear power for its data centers is an important milestone for AI and our transition to clean energy. This deal supports Microsoft’s growing data center operations, as more power is needed for the new AI infrastructure. The agreement sets a precedent for future nuclear energy deals and reflects Microsoft’s commitment to sustainable, reliable energy solutions. Separately, Oracle announced that it plans to build a data center requiring more than a gigawatt of electricity, which three small nuclear reactors would power.

• We have long argued that nuclear power will be a necessary component of our transition to clean energy
• While much talked about, not much progress has been made to date
• The Microsoft deal is very important as it sets a price benchmark that could unlock financing for additional nuclear energy projects
• With Oracle’s announcement, it is clear that big tech is embracing nuclear energy as it seeks large and clean energy sources to power the next stage of AI development

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