Saleheen on Fed/ECB/BOE rate paths, AI inflation, and equity correction risk (with Francine Lacqua)

Asks what tone Kevin Warsh will strike at Sintra.

Francine Lacqua

Jumana Saleheen

Reading from his press conference, focus seems to be shifting to inflation mandate with inflation above target for 63 months. Different forces creating inflation pressure in Europe vs US.

Asks if Warsh has to appease the president or FOMC hawks.

Francine Lacqua

Jumana Saleheen

They will be driven by evidence and policy. Central banks set policy with forward-looking view. Recent data shows upside inflation from AI imports — we're not sure if measurement issues or real. Super core measure of inflation (stripping out housing and volatile) is stickier than expected. That's the concern: AI being inflationary in the short term.

Asks how much she worries about second-round effects in Europe given energy prices.

Francine Lacqua

Jumana Saleheen

Oil prices have gone down but how much is real vs optimism? Volatility makes it hard to read fundamental value. 74-75 — is that where it should be or will it go to 80? Political factors also. Oil dynamics will continue for a while. But there are also megatrends: neutral rate estimates (Philip Lane says 2.5%, upper end higher). Tug of war between AI, demographics, deficits. In Europe, deficits play bigger role meaning higher medium-term interest rates.

Asks about ECB expectations and whether Lagarde's pushback on 'insurance hike' label matters.

Francine Lacqua

Jumana Saleheen

Interesting that Lagarde said in all scenarios it made sense, even if war ended tomorrow — damage is done. Vanguard expects two hikes this year. We've had one, expecting another shortly, taking to neutral rate and probably stopping there.

Asks if July or September, and whether market tightening helps.

Francine Lacqua

Jumana Saleheen

Hard to call but probabilities favor July — get it done, remove uncertainty from market which can be damaging.

Asks what is being mispriced by markets — immigration, debt, AI.

Francine Lacqua

Jumana Saleheen

Main concern is mega caps and AI. Hyperscalers borrowing on bond and equity side. Big question: will rate of return be realized? So far earnings growth positive, fueling further rise. Vanguard expects some sort of correction in equity markets over the long term. Expect rotation toward value stocks and more value outside US. US and tech potentially overvalued.

Two scenarios: if AI delivers transformative productivity, correction is smaller. If not, readjustment and correction is larger.

Asks about Bank of England difficulty given new PM and changed rate expectations.

Francine Lacqua

Jumana Saleheen

Challenge on inflation front with inflation just below 4%, above target for five years. Every extra month pressure becomes more intense. Public expectations and credibility of the bank come into question. Vanguard expects a couple more hikes this year.

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