How $18 Trillion in Industrial Capex Could Force a Fed Pivot

The path toward lower rates is not without its obstacles. Hassett acknowledges the looming threat of energy market volatility, specifically referencing the impact of potential oil price shocks stemming from the conflict involving Iran. Historically, supply-side shocks in the energy sector have been the primary disruptor of central bank easing cycles, as they bleed into headline inflation and dampen consumer sentiment.

However, Hassett’s argument posits that the gains from AI-driven efficiency and the $18 trillion industrial build-out act as a structural buffer. Even in the face of energy-driven cost-push inflation, the broader increase in productivity could prevent these shocks from becoming entrenched in the economy. For the Fed, this would mean the difference between a temporary spike in prices and a sustained breach of their 2% target, allowing them to look through the volatility of oil prices to focus on long-term growth.

Implications for DXY and Market Strategy

For those monitoring the U.S. Dollar Index (DXY), the implications of this outlook are significant. If the Federal Reserve gains the confidence to resume rate cuts based on these structural improvements, the yield advantage currently supporting the dollar could begin to erode. A transition from a restrictive monetary policy to a more accommodative one—supported by real-world productivity gains rather than mere demand stimulus—would be a distinct shift in the fundamental narrative for the greenback.

Investors should monitor upcoming industrial production data and productivity reports closely. If Hassett’s projection holds, these metrics will show an economy that is expanding its ability to produce goods and services without triggering excessive inflation.

What to Watch Next

Looking ahead, the market will be looking for confirmation that the $18 trillion in investment is translating into realized output. Traders should remain vigilant regarding the Fed’s messaging in the coming months, specifically looking for any shift in rhetoric that acknowledges the role of supply-side productivity in their inflation modeling. Should the Fed signal a willingness to look past energy volatility and focus on the structural improvements in the U.S. industrial base, the door could swing wide open for a return to a more dovish policy trajectory.