The US Federal Reserve Board gathers today in Jackson Hole, Wyoming for its annual retreat. People in high finance will say that Jackson Hole is the Woodstock of central bankers, though that may say more about central bankers than about the event. Nonetheless, the proceedings are scrutinized carefully by economists, bankers and fund managers around the world, probing for clues as to the direction of the world’s biggest economy.

Running since 1981, the event brings together the governors of the American central bank, along with leading academics, government officials, corporate leaders and foreign guests for three days of brainstorming on the global economy, the state of markets and the future direction of policy. It seems fitting that this year’s event should start just as the Democratic Convention is ending in Chicago, because it takes place at an extraordinarily precarious moment in the country’s political history.

The economic context is delicate enough on its own. The economy seems to be teetering on the brink of a recession and markets have been screaming for interest rate cuts to stave one off. However, inflation hasn’t yet reached the point at which the Fed can conclude that it has decisively won the battle to bring it back to earth. As a result, it’s not yet clear if the Fed has waited too long to cut rates, or risks doing so too early if it moves soon.

But it’s the political backdrop that makes this year’s retreat so fraught. Both sides of the American political divide are calling this year’s presidential election the most consequential in the country’s history. Democrats say freedom is on the ballot and Republicans say that if they lose, Americans won’t have a country anymore. The stakes could barely be higher, which means the vote will be hotly contested and possibly disputed.

Amid all this, the Fed has to decide when to begin its rate-cutting cycle, and how far to take it. Investors widely expect it to make a first move next month, starting with a 0.25% cut to its target Federal Funds rate, which currently sits in the 5.25-5.5% range. It may not seem like a lot, but it would signal to markets the future direction of travel. And while the governors will be guided by the data on inflation and the economy in making their decision, no matter how justifiable their decision may be, it will immediately get spun politically.

Depending on what the Fed decides to do next month, the stock market could rally, or it could sink. The dollar, already weakening, could plunge. Interest rates might shoot up. In light of all this, there’s a good chance the governors may use their speeches to break it to the markets gently, indicating a steady-as-she-goes approach to cutting gradually in the context of growing confidence that the economy is bearing up well. If at the end of it what they get is a soft landing — slower if steady inflation, slower but steady growth, gradual easing of interest rates and neither a crash nor boom in the stock market — if in short they can arrange an economy so unexceptional they stay out of the headlines until after the election, they’ll no doubt feel relieved.

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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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