Deutsche Bank says AI concerns are comparable to the "peso problem" and the current Fed rate cut expectations may be irrational

Deutsche Bank said that investors' expectations of a rate cut by the Federal Reserve may be exceeding what is justified by economic fundamentals, as fears of the kind of artificial intelligence impact they are concerned about may not materialize at all. Strategists like Matthew Raskin wrote on Wednesday in a report that this situation is similar to the classic "peso problem," where investors are factoring in the risk of a low probability major event happening in the future. The term "peso problem" originated in the 1970s when the market was worried about the sudden devaluation of the Mexican peso, hence undervaluing Mexican assets in the long term. However, the devaluation did not happen for many years, making this risk premium appear irrational in hindsight. But investors at that time had to be cautious of potential black swan events. Deutsche Bank's strategists believe that current concerns about AI potentially disrupting the labor market, leading to reduced businesses and employment opportunities, have similarly influenced bond traders' expectations of Fed policy.