The Warsh case scenario

Good morning,

AI slop food menus are going viral for their unsettling renditions of dishes, from perfectly circular shrimp to the lurid breakfast burrito of nightmares. In the AI age, creepy pasta is real. In today’s edition:

• What the first rate hike since 2023 would mean
• New Ramp data shows token prices are falling
• p(doom), or the probability of an AI apocalypse

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What the first rate hike since 2023 would signal

The Warsh case scenario… is now the most likely. Investors are betting that Kevin Warsh’s Fed will raise rates tomorrow for the first time in three years. Traders are pricing in a 93% chance that the U.S. central bank will hike its target rate by 25 basis points on Wednesday. This would be a pretty clear indicator that the Fed doesn’t think rates are at an acceptable level.

• Friday’s CPI showed that consumer inflation stayed hot in August, boosting the odds of a hike. CPI rose 3.4% on an annual basis, matching July’s price growth and significantly above the Fed’s inflation target.
• The biggest increases were in energy and fuel-related categories, as the Iran war continues to push up oil prices. Gas prices were up 27.4% year-over-year, while airline fares surged 23.4%.

Even worse: Wholesale inflation accelerated. The Producer Price Index grew by 0.4%, heating up from 0.1% in July. The PPI is an early warning system for future inflation, since wholesale price increases often get passed down to consumers.

If the hike is right… Whether or not the Fed raises rates tomorrow, consumer borrowing costs are already rising. U.S. Treasury yields have surged, raising rates for loans like mortgages and car loans. Yesterday the U.S. 10-year Treasury yield crossed 5% for the first time since 2023. Treasury Secretary Bessent recently said his agency would buy up to $6B in government bonds in an effort to curb rising yields and borrowing costs. There’s market pressure to raise rates, and political pressure to not raise.

The bottom line:

This isn’t a “one-and-done” bank… The implications of a hike would be much bigger than a 25 bps bump. The Fed typically doesn’t make one-off moves in either direction. If a hike does happen, it signals there are more to come. Higher rates are a double-edged sword: they’re designed to curb inflation, but to do that they need to curb consumer and business spending (they also tend to dampen stock prices). While consumer spending has been resilient, in July U.S. retail sales posted the largest drop in more than a year.

The latest Ramp AI Index reveals a weakness

In August, Anthropic slightly widened its AI adoption lead over OpenAI. But while paid business adoption of AI continues to grow, the pace is slowing.

Meanwhile, the price of AI is falling. As companies scrutinize their token spending, OpenAI and Anthropic have announced a series of price cuts in recent months. The data backs it up:

• Ramp’s latest data tracking the effective price per million tokens shows that prices have declined 41% to $0.68 as of last week, down from the 2026 peak of $1.15 in March.

In June, we wrote about the AI price wars and how a race to the bottom may be untenable for the labs. But as Anthropic and OpenAI fiercely compete against each other and their Chinese rivals, the fight is moving to the pricing field — and there’s still not much yardage.

Competing on price would be fine if AI companies are able to drive growth in the form of volume, said Ramp economist Ara Kharazian, who has been tracking cracks in the AI thesis.

“So far, they have been. Unfortunately, that volume may not be large enough to counteract the effective decline in prices,” Kharazian said.

Read the full findings from Ramp Economics Lab.

Term sheet: p(doom)

Last week, everyone was talking about the Anthropic engineer who quit over fears that labs aren’t doing enough to stem the existential threat posed by rapidly evolving AI.

• “The people building AI earnestly believe that it could kill us all by the end of the decade,” the engineer, Jacob Coxon, wrote on X.
• Evan Hubinger, a lead scientist at Anthropic, followed up with: “We really do earnestly believe AI could kill all humans! I personally think it is >10% within the next decade.”

To express the probability that AI will kill us all, insiders use a term called p(doom), or the probability of doom.

It’s an estimate of the likelihood of humans or machines weaponizing AI to cause a) a total extinction event, b) societal collapse, or c) any other catastrophic scenario.

Of course, there’s no way to actually calculate the odds of this, but experts have tried.

Concerns over AI risks have surged to new heights after cybersecurity debacles like the Hugging Face incident. Over the weekend, the CEOs of both OpenAI and Anthropic issued somber warnings about the threat of AI.

Sam Altman recently told Fortune that OpenAI won’t go public this year given the current safety concerns.

All this to say: we’ll be hearing a lot more about p(doom).

Signals Shortlist

• Costco raises price for Kirkland motor oil, sets purchase limit (ABC News)
• Bank of America expects Q3 investment banking fees to fall over 10% (CNBC)
• Oil surges as Saudi pipeline shutdown brings fresh supply risk (Bloomberg)
• Kroger cuts sales forecast, citing pressured shoppers (Wall Street Journal)
• Trump pushes crypto bill, escalating industry’s fight with banks (Bloomberg via Yahoo Finance)

🗓️ Leading Events:

Tuesday, September 15: Fed meeting begins.

Wednesday, September 16: FOMC interest rate decision. Retail sales. Earnings expected from Lennar.

Thursday, September 17: U.S. housing starts. Bank of England rate decision.

Friday, September 18: Bank of Japan rate decision. iPhone 18 Pro launches in stores.

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