President Trump brought several leading technology executives to the G-7 for a special meeting focused on artificial intelligence. However, European Central Bank President Christine Lagarde used a speech in Venice on June 17 to warn that AI could potentially contribute to dangerous financial crisis, adding that the ECB is determined to prevent that from happening.According to Lagarde, “We cannot stop artificial intelligence, even with our sound regulations.” She added, “What we can do, however, is prepare ourselves so that our citizens can benefit from it and be protected from its dangers, and that’s what we’re doing.”In effect, Lagarde was defending the EU’s Digital Services Act, and the timing of her remarks appeared intended to counter the influence of U.S. technology executives at the G-7. It is further evidence of the widening divide between Europe and the U.S. on technology policy, with the EU continuing to take a more aggressive regulatory stance toward American tech companies. Lagarde’s suggestion that AI could trigger a financial crisis, however, seemed exaggerated and unsupported.In practice, Europe remains at war with U.S. technology companies and continues to plan to fine and tax these companies, so they have to run to President Trump for protection. Perhaps, unsurprisingly, the U.S. fired back, pulling the visas of the creators of the European Union’s Digital Services Act so they can no longer visit the U.S., and indicating there will not be a détente anytime soon. Related: Navellier to SpaceX buyers: wait for escape velocityNATO and Ukraine are points of contention between the U.S. and Europe, but their war on U.S. technology companies is brewing in the background. Ultimately, it will rear its ugly head again, especially as the AI trade evolves and companies and governments grapple with how to finance it. In Europe, The Hits Keep on ComingThe ECB’s comments on AI are not the only example of Europe’s questionable policy approach. Most central bankers understand that monetary policy cannot directly control food and energy prices. Nevertheless, the ECB raised its key interest rate by 0.25% to 2.25% on June 11, while warning that “the outlook remains uncertain, with upside risks for inflation and downside risks for economic growth.” The ECB also said its rate increase left it “well positioned to navigate the uncertainty caused by the war.”The problem is that higher interest rates will not lower oil prices or fix Europe’s energy challenges. Many European economies are already dealing with demographic decline and weakening consumption, yet the ECB is trying to further restrain demand with a rate hike that does little to address the real sources of inflation. Normally, currencies strengthen after an interest rate increase, but the euro declined, reflecting broader concerns about Europe’s policy mismanagement and bureaucracy.Warsh Makes His Fed DebutSpeaking of inflation, after better-than-expected core inflation readings in both the CPI and PPI reports, I was hoping the Fed would signal that inflation has been transitory and largely tied to high crude oil prices.As expected, the FOMC did not change key interest rates. However, 9 of the 19 FOMC members projected a 0.25% rate hike in the latest “dot plot.”Since market rates have already declined somewhat and could fall further as energy prices ease, I am still holding out hope for a Fed rate cut later this year, although I remain in the minority. Warsh also confirmed that the Fed has dropped forward guidance, marking his first major stamp on the FOMC.Chairman Warsh’s press conference was impressive. He made clear that the Fed is re-evaluating the economic data the FOMC monitors. Notably, Warsh discussed a task force reassessing productivity and its impact on jobs, as well as another task force focused on how the Fed evaluates inflation and identifies its true catalysts.It is increasingly clear that Warsh intends to use these internal reviews to shift the Fed’s narrative, improve inflation forecasting, and better account for productivity gains that are not inflationary. This will take time, but the process appears to be starting at the staff level, and a new narrative may begin to show up in upcoming Beige Book surveys.Related: Warsh’s first Fed meeting resets interest rate-cut bets
