American economists are split pretty evenly about whether the biggest threat facing the economy is inflation or unemployment. On Wednesday, the Federal Reserve issued its own judgment. In cutting interest rates by a quarter-percent and signalling that more cuts would likely follow, the central bank tilted towards the camp which fears the economy may be headed for recession.

Over the next couple hours of trading, markets whipsawed, initially rallying then, when it appeared that the Fed would be easing aggressively in the months ahead, plunging dramatically. Finally, after Chairman Jerome Powell struck a more cautious, hawkish tone at the press conference, the day finished with stocks and bonds marginally lower, the dollar stronger, and crypto assets down for the day but up for the week. It would appear that investors, too, are equally divided. This tug of war could have room to run.

The fact that the Fed is itself deeply divided may explain the skittishness. Nearly half the governors expect there to be two more cuts this year, but a third expect none, and one even voted to raise rates. Meanwhile, way out on a limb is Donald Trump’s newest appointee, Stephen Miran. Just hours into his job, he demanded not only a half-point cut but another five later in the year. Whereas Powell said yesterday that the indicators for the economy are so mixed that “it’s not incredibly obvious what to do,” Miran dissented openly with all his colleagues and said it’s very obvious what needs to happen: cut, baby, cut.

For those who doubted that any Fed governor would come in seeking to bring down interest rates fast and hard just because the President wants him to do it, Miran’s toeing of the party line will be a concern. With inflation still well above the Fed’s target, and signs of growing pressure in the pipeline, that sort of aggressive easing would raise real risks of inflation getting out of control. But in the meantime, it could send asset markets soaring, at least for a while. That may be the administration’s aim.

The next four months will therefore test the nerve of both investors and Fed governors. One analyst summarised the Board’s consensus forecast for the road ahead as “stagflation-lite” — a small uptick in unemployment, a slowdown in growth but not a recession, and inflation edging upwards slightly to about 3%. If that’s what transpires in the months ahead and the Fed keeps cutting interest rates accordingly into a soft but not too inflationary economy, markets will have a favourable tailwind. But if any of those predictions turn out to be off the mark — in particular, if inflation rises above that 3% mark, or alternatively if the economy falls into a recession — investors may get antsy and begin dumping assets.

Markets will probably also pay even closer attention than before to the President’s battle to unseat Lisa Cook, after a federal court ruled this week that he couldn’t remove the Fed governor from her position. So far, investors have remained pretty calm about the risks of Trump seizing control of the Fed and bending it to his will. Miran’s apparent willingness to channel his master’s voice suggests that nonchalance may be misplaced, though. If Trump does find a way to get rid of Cook, then markets could erupt.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

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China is trying to catch up with America on artificial intelligence. The Wall Street Journal has reported that Zhipu AI — one of China’s six “AI tiger” LLMs — has released a new model that can rival leading US systems, including Anthropic’s Mythos, in cybersecurity tasks such as pinpointing security bugs. While this marks a milestone in China’s drive to catch up with Western AI capabilities, strong performance on a single benchmark does not mean it has taken the lead. Chinese models still lag behind their Western counterparts in broader capabilities, such as autonomous operation. Skepticism is therefore warranted before resorting to hysterical conclusions, but complacency about the geopolitical implications of China’s AI advances would be an even greater mistake.

On the infrastructure side, Chinese AI is still constrained by access to advanced chips, with American labs way ahead in computing capacity as well as investment. Analysis from earlier this year suggests that Chinese models are likely to be at least a few months behind those in the US. But they are still continuing to make progress, or that the geopolitical importance of AI will be decided only by whose LLM has ventured deeper into the technological frontier. The practical applications of AI, countries’ to capture foreign markets, and the application of AI into the real economy will matter just as much.

Here, China may hold an advantage. As with its dominance across many critical supply chains, Beijing may not need to produce the most advanced AI systems — only those that are affordable and widely deployable. In doing so, it could consolidate global influence by supplying functional, low-cost AI at scale.

Beijing seems to be pursuing exactly that path, developing an AI “open-source” strategy that offers affordable, widely available AI models for companies and individuals to use and modify as they wish. The production of the DeepSeek AI model, which matched the performance of Silicon Valley tools such as ChatGPT at a fraction of the cost for users, created goodwill among Chinese models with developers.

The four most popular models on OpenRouter, an AI hardware platform for developers, are now all Chinese. The goal for China is not only to win the frontier-model race, but to make its systems the default layer of AI adoption across industries and global markets. For most economies, the choice is increasingly between an affordable tool they can deploy now and a more robust one that may be out of reach.

And while the countries adopting Chinese models may be exposed to political pressure and cyber threats from Beijing, safer and more capable alternatives matter little if they are unaffordable. American AI companies are already under pressure to monetize products whose operating costs are rising. If Chinese open-source models become the cheap default for startups, universities, governments and businesses across the developing world, then America’s AI lead will be eroded from below.

Perhaps more concerning for America in the long run is how AI can give Chinese manufacturing even more strength, through the ongoing integration of AI as a general-purpose technology. China’s new Five-Year Plan mentioned AI more than 50 times and includes an “AI+” action plan aimed at spreading AI across the economy.

Beijing has been pioneering automation of its critical infrastructure for years, with promising recent results in increasing warplane production capacity. In that regard, China’s open-model strategy and manufacturing dominance will reinforce each other. Cheap, adaptable models accelerate deployment across the real economy while those deployments generate real-world data and use cases that can feed back into further model improvement.

The United States should not dismiss the importance of its lead in the AI race. That lead worries Beijing, not least because a more automated Chinese economy would also become more vulnerable to AI-generated cyber threats. But nor should Washington assume that China cannot catch up with American capabilities over time.

This AI competition represents part of a broader struggle over tech supply chains and geopolitical influence. Decisions over whether to adopt US or Chinese models could produce a more fragmented global reality, with different regions relying on different cloud providers, chips and security structures. The result will likely be a global economy which is divided into competing spheres, rather than one which produces a single winner.

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Miquel Vila is a political and geopolitical risk consultant focusing on industrial strategy, critical infrastructure and global supply chains.

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