Back Research Notes Bessent’s Message: The Fed’s Next Era Will Be AI-Driven Published on August 17, 2025 By Jordi Visser In this week’s video , I highlight how Treasury Secretary Scott Bessent and the administration are signaling that the next Fed chair will mark a turning point. While today’s Fed remains backward-looking and overly academic, the message being sent to markets is that policy is shifting toward a forward-looking framework designed for an AI-driven economy. I view this as a strong indication that policymakers are willing to tolerate a higher inflation target in the near term, under the belief that rapid AI-driven productivity will ultimately prove deflationary and create room for looser policy. This would have major implications for factors if the market embraces a new regime shift around the view of an acceptable near-term higher inflation target going forward from the White House. Beyond the Fed, I cover the rotation into small caps, global markets breaking to new highs, record-low corporate bond spreads, and strong earnings momentum lifting forecasts. I also outline the stages of AI adoption from efficiency gains to broad automation to embodiment as well as the important of Tesla’s full self-driving rollout for PMIs, deregulation via the Doge AI project, tokenization, and the potential for gold revaluation. These are the forces converging into a new market regime, defined less by old models and more by technology, policy shifts, and fiscal dominance. Key Timestamps (00:00–01:31) • Small caps surge, outperforming the S&P on hopes of rate cuts. • Shift away from Russell 2000 to purer small-cap index signals regime awareness. (01:53–02:43) • Bloomberg factor monitor shows size and momentum crowded with high Sharpe ratios. • Signals regime shift underway with AI adoption spreading beyond the MAG7. (02:59–03:47) • Global equity markets (DAX, FTSE, Shanghai) hit record or multi-year highs. • Bank indices break out, reinforcing reflationary boom narrative. (04:28–05:14) • PMIs rising, earnings beats leading analysts to lift 2025 estimates. • Broad-based strength across six of eleven S&P sectors. (05:55–06:43) • Despite caution from professionals, flows from quants, retail, and buybacks drive upside. • Earnings growth far above expectations (12% vs. 3%) continues to power market. (07:06–08:24) • CPI data shows manageable upticks, core goods inflation remains subdued. • PPI spike (0.9%) raises concern but context suggests noise, not trend. (09:04–10:09) • Employment tax receipts up 7.8%, signaling wage/income strength. • AI contributes to hiring challenges even as payroll dollars increase. (10:31–11:31) • Bessent calls for 150–175 bps of cuts, targeting ~2.6% Fed funds rate. • Political backdrop: Trump pressing for lower rates, Powell under pressure. (12:13–14:32) • Administration signals next Fed chair will be forward-looking, not academic. • Higher inflation tolerance seen as necessary bridge to AI-driven deflation. (18:44–20:13) • AI adoption framework: wave one (efficiency), wave two (automation), wave three (embodiment). • Expect labor displacement pressures alongside productivity-driven GDP growth. (23:27–24:12) • Tariff lawsuit threatens Trump’s authority, creating uncertainty. • Removal of tariffs could benefit small caps and manufacturing. (24:36–27:41) • Debate over gold revaluation emerges as potential fiscal tool. • Seen as a response to fiscal dominance, with bullish implications for gold/crypto. (28:02–30:50) • AI-crypto collision accelerates with tokenization reshaping finance. • Tesla’s FSD rollout marks beginning of AI embodiment in the physical world. (32:30–33:31) • Doge AI project reviews 200,000 regulations, aiming to cut 50% by 2026. • AI-driven deregulation could unlock trillions in savings and efficiency gains. (33:54–35:56) • U.S. crypto plan and tokenization described as the most significant economic shift in decades. • Tether’s Finance 2.0 vision points toward a rebuilt capital market stack. Watch here