The global economy is undergoing profound shifts thanks to rising inflation, tightening labor markets, and concerns over the independence of the U.S. central bank. These factors, combined with an unpredictable policy environment in Washington, are converging to create one of the most uncertain economic landscapes in recent history.
For investors, business leaders, and policymakers alike, these overlapping forces raise pressing questions: Which sectors are best positioned to withstand the turbulence? What does this volatility mean for innovation, entrepreneurship, and long-term growth? And how can decision-makers prepare for what comes next?
To help unpack these issues, Columbia Business School’s Chazen Institute hosted a conversation featuring Abby Joseph Cohen, professor in the School’s Economics Division and retired partner and U.S. chief investment strategist at Goldman Sachs, in dialogue with Glenn Hubbard, Dean Emeritus and Faculty Director of the Chazen Institute.
Drawing on decades of experience at the intersection of markets, policy, and strategy, the two explored the structural forces reshaping the global economy. They offered insights into how leaders can interpret the signals amid the noise.
Note: This transcript has been lightly edited for clarity.
Glenn Hubbard: We're at a juncture where inflation is well above the Federal Reserve's target, and the labor market and economy are clearly weakening. What do you think the key sources of policy uncertainty are for the Fed and how does that uncertainty affect the market outlook and how should companies react to that?
Abby Joseph Cohen: When that FOMC gets together this week, they're going to be looking at data for the economy, not just the labor data, but also the demand data that clearly has weakened over the last few months. Consumer spending has decelerated, as one example. And the other piece not getting enough attention is that business fixed investment has also decelerated very sharply. Equipment spending last year increased on the order of eight to 10% depending on the category, but are now down to one or 2%—still growing but growing at a much slower pace.
This is a Fed that I believe will be trying to balance its dual mandate and, this time at least, I believe they'll be focusing on slower growth. When I listen to their speeches and read what they have written, that is, the various voting members of the FOMC, I think that their near-term concern is more on the growth side than on the inflation side, and they feel they can take care of inflation later on.
Also, there is more uncertainty about inflation. They're not yet sure how much of it is one-time related to tariffs and some other issues. So my expectation is they'll do a 25 basis point cut this week; the Treasury market has already built this in as a 100% likelihood. Some investors are assuming an even larger cut. I believe the FOMC wants to move slowly and steadily as more data come in. And so, how does the market react to a cut this week? There may not be much of a reaction because it is already expected. Keep in mind that the Fed adjusts the federal funds rate, that's the rate at which banks borrow and is at the very short end of the yield curve. That's not where most borrowing in the economy occurs.
Households may borrow to purchase cars or homes, that is multiyear loans. Corporate bonds typically have maturities of five to seven years. The yield curve has already steepened suggesting that investors are already expecting lower short rates. So I'm not sure there's much of a bond market reaction to Fed ease.. My worry is the equity market, which has done very well since April with solid share price gains..
All other things equal, if interest rates go down, the value of equities goes up because the future value of those equities and the flow of earnings and cash flow are greater at the lower interest rate level. All other things being equal, lower interest rates mean higher equity prices. Still, all other things are not equal because with this slowdown in economic growth that I think will be encouraging the Fed to lower interest rates, we're also looking at slower growth in demand, and slower growth in revenues.
In the second half of the year we may also see some profit margin compression, because the economy is slower and also because of the higher tariffs. In cases where the tariffs have already hit, we know that many companies are trying to absorb it themselves, and not pass the cost increases along to consumers. They cannot keep that up forever. So they will either have to increase the prices paid by consumers or adjust other expenses, such as slower job creation. Tariffs are a sales tax on domestic consumption. It is a fiction that other countries are paying the tariffs. Raising the price to the consumer hurts demand and revenues. And if companies absorb the tariffs, that has a negative impact on profits as well.
I worry that profit growth, which has been quite good to this point, will be under pressure in the second half of the year. And I will be watching the third quarter earnings reports very closely as they come in October. Pay attention not only to the details of the third quarter, but also what companies provide as forward guidance for the next several quarters. Guidance in several industries may reflect slower economic growth and tighter profit margins. What does that mean? This is not a supportive set of factors for the equity market. Equities right now are priced as if things will continue to be good and for many companies maybe they will. But, an increase in volatility is very likely as are sharp divergences in performance within the equity market.
Hubbard: You mentioned the 25 basis points cut. For the sake of argument, let's suppose the Fed decided to go big or go home. So let's cut it a lot, 50, 100 basis points, and follow through with all other things equal in your argument.
Cohen: First of all, why are they going big? Are they going big because the economic data they're looking at is even weaker and they're even more concerned about a slowdown in economic growth?—that's not so good. Maybe they're concerned that people in the administration are breathing down their necks and saying, ‘you better do this or we're going to step on your independence as a central bank.’ And I don't think that would be viewed positively by the markets either.
Hubbard: I want to come to two areas of great interest in the markets and the economy, both of which have some positive elements, both of which have some froth. Let me start with cryptocurrencies and stablecoins. So walk me through how you should think about their role in markets and how business people should be looking at them.
Cohen: I'm on the skeptical side regarding cryptocurrencies. Let’s think about how a cryptocurrency is priced. It's largely momentum and based upon whether somebody else is willing to buy it from you. There is no underlying intrinsic value. Also, crypto remains used primarily for transactions where the transactors don't want anyone to look at it, and estimates are that about 90 percent of this is for illicit activities. That's not a good sign. The industry has moved towards stablecoins and I admire that clever branding. Unlike a cryptocurrency where you don't know what the value is and trading is highly volatile, a stablecoin sounds great.
There are some applications for stablecoin, but let's back up a minute. What is a stablecoin? It is a digital token that is ultimately backed by a national currency. The benefit of a stablecoin is that transactions happen faster, as may also be the case with digital currencies issued by various governments. However, stablecoins may not be as stable or risk free as promoters suggest. A possible analogy would be money market mutual funds which were always viewed “as good as cash” because the managers would price funds at a dollar and they always traded at a dollar. Until they didn’t. Money market funds “broke the buck” during the 2008 financial crisis, reminding investors that they really weren’t cash. A stablecoin is basically a security, and not cash.
Hubbard: I want to take you to another area of optimism and maybe potential froth, which is generative AI (GenAI). How do you think about the uncertainties surrounding GenAI for markets and economies, and how do you think business leaders ought to navigate them?
Cohen: First of all, we have seen an explosion in investment by companies and individuals in this area—those that are buying the products, companies that are building the products, and users who are trying to sort it out. History shows that every time a new technology is developed, going back to the 19th century railroads and so on, much of that early capital is not well spent partly because of excess capacity or perhaps some of it is bleeding-edge technology. And we are hearing more and more about these kinds of instances. For example, retail-facing companies thought chatbots would be everything they needed for customer service. And I'm a customer, no thank you. I'm not really satisfied by how they work.
I was trained in computer science and believe that much of what is under the heading of AI isn't artificial intelligence. It's basically data retrieval. Databases used to be only numbers but the large language models have broadened data retrieval to include words as well. However, it's still data retrieval and it's not necessarily intelligence; it's just really fast data retrieval and there are clearly some benefits to it. There are also difficulties that arise, including hallucination even with clean data sources. In these cases, it’s critical to have a subject matter expert—a person—provide guardrails.
There's always some sort of disruption when a new technology is created. Let's go back a few years. The creation of the Microsoft Office suite basically meant that there were fewer people who were in what used to be referred to as secretarial or assistant positions. People were doing their own stuff, but what happened to those who lost their jobs? Most of them were retrained, and many of them were able to stay in their newly created positions, which often added higher value and were more productive, and they ultimately got paid more. Not everybody, but many.
One of the testaments to how we treat new technology in general is how we prepare people for it, number one. Number two, what do we do not just for people who are dislocated but also for the people who are enhanced by it. One of the clear groups of losers, interestingly enough, with the availability of AI tools are computer programmers. The people who do simple coding are the ones at the greatest danger because it is the iterative jobs in all sectors that are at risk.
How do you prepare for a career in an AI environment? You focus on domain expertise and how you use AI to enhance your own productivity, to let the system, if you will, do the iterative, boring, repetitive functions so that you can think more broadly. There are many fine applications thus far, mainly those embedded in organizations. For example, the financial services companies that are allowing their professionals to use AI systems to test scenarios and probe for risks.
Hubbard: I want to turn to geoeconomics, the use of tariffs, sanctions, things like that. How important do you think this is going forward and how does it change business strategy? Is globalization dead as a result?
Cohen: We are clearly in a new environment in terms of trade policy. The United States has benefited for decades from the system that was created post-World War II. The United States always presented itself as just one part of the puzzle. Other countries also were involved in the decision-making, but the United States largely dominated the way things were structured and as a nation we benefited. But so too did our trade partners, many of whom were in very bad condition at the end of the Second World War.
The current environment is very different. The Trump administration, as did the Biden and Obama administrations, identified areas in which our trade partners might have instituted some practices harmful to US interests. In some cases the global economy has evolved in ways that require adjustment. Even so, the disruptive manner in which trade policy is now being implemented is likely not a good approach..
Effective tariffs are already up from roughly 2% to about 18% for the U.S. economy. Again, it's a sales tax. It's highly regressive for the U.S. consumer. We've irritated a lot of our friends and allies. Instead of focusing our trade concerns with other big economies that have been engaging in unfair practices, we’ve taken aim at our closest allies and neighbors, such as Canada and Mexico. Our most important trade alliance for years has been in North America: US, Canada and Mexico. These relationships should be cultivated, not frayed.
Hubbard: And is globalization dead?
Cohen: Globalization is not dead. Globalization, however, is shifting away from the U.S. The U.S. has been dominant in many ways for many years: the world's largest economy, the world's largest financial markets, the world’s largest scientific enterprise We have had a very significant presence as well, not just in the global economy but in global geopolitics. Other nations are taking advantage of the erratic nature of U.S. policy to step up and say, ‘why don't you count on me instead?’
For example, China has actively sought to establish trade relationships especially when the U.S. has withdrawn from trade alliances. When the first Trump administration pulled out of trade discussions regarding the Pacific alliance China stepped in to create a new pact which excluded the U.S. The Chinese have also moved aggressively to build trade relationships with commodity producers throughout the world including Africa.
The U.S. is still extremely important, but we’re not as dominant as before. We're also losing some credibility as other nations are seeking consistency in policy from their trade and geopolitical partners. Companies can deal with policies they don't like as long as those policies don't keep shifting. Companies currently are holding back on investment in equipment, and they're holding back on hiring workers. They just want to see how things go. One thing I'll be watching about globalization is the new supply chains which may result from the Trump tariff policies..
U.S. companies and others built very complex supply chains over the years, which ultimately benefited the consumer and those companies. What do the new supply chains look like? It is too soon to know.
