10AM Hour: DoD’s Emil Michael on AI Fears, Fed Decision on Deck, C-Suite Warns about Fuel Prices 9/16/26

0:00Your financial life rarely fits between nine and five, and the questions shaping your future don't follow a schedule. That's why Citi created Citi Sky, a secure AI member of your Citi Wealth team built with the Gemini platform on Google Cloud. Whether expanding your portfolio or planning your future, you'll be able to access tailored wealth guidance on your time. Start building with Gemini at cloud.google.com slash AI. Citi Wealth investment products and services are provided by Citigroup Global Markets, Inc., member FINRA and SIPC. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab.

0:34Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts. Good Wednesday morning. Welcome to Squawk on the Street. I'm Sarah Eisen with Carl Quintanilla and David Faber. We are live, as always, from Post 9 of the New York Stock Exchange. It is Fed Decision Day. Wall Street is pricing in the first rate hike since July 2023, as surging energy prices and rising bond yields complicate the macro picture.

1:16Former Atlanta Fed President Dennis Lockhart will join us with his expectations there. Plus, the AI pacing debate heating up as Dario Amadei doubles down at Dreamforce. We'll discuss with Undersecretary of Defense, Emil Michael, who helped lead the Pentagon's blacklisting of Anthropic, remember, earlier this year. And we'll talk about what's driving this early pop for Intel shares as well, up more than 4%. Busy day for data. Retail sales very strong. Let's get some inventories as well with Rick Santelli. Hey, Rick. Good morning, Carl. Yes, this is July read. Now, it's a third quarter number, so it could affect GDP.

1:51We're expecting up eight tenths on business inventories. comes out exactly at 8 tenths. That is the best read in terms of strength going back to the high water market this year on business inventories, which was March at one full percent. And I do want to point out, Carl's absolutely right. Retail sales was strong, even with the inflationary price aspects boosting it a bit. And in terms of what's going on in the marketplace, 92.9 % for that hike that we've been discussing. And we also have National Association of Home Builders housing index out. This is September read. And for that, we go to Diana Olick.

2:28Diana. Well, Rick, homebuilder sentiment dropped three points to 32 in September on the NAHB Wells Fargo index. That is well below expectations. The street was looking for 34. Anything below 50 is considered negative. This is the lowest reading since last September when it was also 32. Builders cite high mortgage rates, labor shortages and rising material costs. Now, Mortgage rates, of course, have shot higher this month with the 30-year fix now at the highest rate in well over a year at 7.22 percent, according to Mortgage News Daily. Of the index's three components, current sales conditions fell four points to 35, future sales expectations dropped six points to 37, and buyer traffic held steady at 23.

3:1266 percent of builders reported using sales incentives in September. That's up from 63 percent in August and the highest share since last December. 38 percent cut prices up from 35 percent in August. And regionally, sentiment was highest in the Midwest and Northeast. And while it was lowest in the West, it did gain one point from August. Sarah. OK, thank you very much, Diana. All of that setting us up for a Fed decision later today where the Federal Reserve is expected to raise interest rates for the first time in a few years. At least that is what the bond market is pricing in right now. But I do think it's a little bit of a controversial move here.

3:52And certainly, if you read some of the commentary on Wall Street, not everybody is on board with a hike, or at least not everyone thinks they should hike. I think more economists agree that they probably will, given some of the signals. But should they or should they not? Here is Standard Chartered with a note that they put out on the eve of the Fed meeting. The title of the note was, Hiking is the Wrong Choice. And the quote we picked out there was, the correct Fed policy decision, in our view, is straightforward. Stay on hold until the noise from tariffs and data revisions dissipates. A lot of people are making this case that what we're dealing with in this inflationary surge is a supply shock.

4:30It's from higher oil prices from Iran. And yes, it's lasting longer than anyone expected, seven months. But there's a debate about whether that's really filtering through into inflation beyond things where you would expect, like gas stations, diesel prices, transportation prices, airline fares, all of that directly from oil. And what can the Fed really do about that? Goldman Sachs, they came out this week and they said, OK, we think they're going to hike. But they made the case for a no hike. We think that all of the overshoot of 2 percent on inflation is due to one-time factors whose impact is fading, that the improvement in core PCE inflation to a 2.5 % pace over the last three months is an early sign of this, that high inflation looks broad-based mainly because of tariff effects, that inflation expectations are not an immediate risk of unanchoring, and that the economy is not overheated, which is the reason to hike.

5:20I mean, traditionally, Fed hikes when economies overheat and produce a lot of inflation. We also heard this argument from Stephen Myron, who stepped off the Fed recently as a governor. He also thinks that a hike would be a mistake. Listen to what he said. So I don't think they should raise rates. The data have been moving in a better direction. Core CPI is the lowest level since March of 2021. We've almost completely round tripped on that measure back to the pre-pandemic levels. That's monumental. So I wouldn't say it's unanimous on Wall Street about people saying they shouldn't hike. But there is this case and this question about whether if they do that now down the road, it will make it harder for things like employment, which is the other side of their mandate.

6:09And if we are really in a disinflationary trend, if that's the wrong move. Yeah. I mean, the Fed's preferred measure hasn't come down that much from 3-4 to 3-3. Gunlak overnight said he thinks CPI next print will have a four handle. That would get people's attention. And maybe the mistake was cutting 150 bips when employment really wasn't under threat. Under Powell. Right. I know it's ironic that the president complained about Powell when he cut rates and Warsh might hike rates to be who he appointed. Do we still get a dot plot? We do. We get one today. And is it important? No. OK. It's still not.

6:44Even if it shows that there's going to be more than one hike or, you know, that. Look, last time, I think it's even less important now because Kevin Warsh did not participate in the dots last time. He doesn't like the dots. He doesn't like the dots. He doesn't like forward guidance. But they haven't gotten rid of the dots yet. Not yet, but I feel like they will phase out the dots under his leadership. They're waiting for their, you know, their committees to come back with. Oh, right. The recommendations. With the recommendations. You know, they have all these these experts out there. I don't mean to make it sound like hike is necessarily a mistake.

7:12You know, there are there are some economists out there who say they should go even bigger. T.S. Lombard. I don't know if you saw this. Oh, yeah. Go 50. They should hike double. Why? They say it's worse. Should I get worse today? Warsh hikes 25. A year ago, he wanted the Fed to cut more than they did. He should hike 50, even based on his own playbook, but he won't. Their case is basically that, and you really have to believe this to think this, that we're at the beginning of a cycle, basically, on the economy, that the economy is just picking up steam and speed and therefore will produce more inflation.

7:43And so he should get ahead of that. I don't think that that's a unanimous view. But look, there are lots of views out there. If they do hike today, one thing to keep in mind, Deutsche Bank looked back on previous hiking cycles. There's usually more to come. The average hiking cycle across history is 22 months long and you get almost 5 % of rate hikes. So consider that when you think of the little 25, but you asked me, it doesn't matter. So this is, this is, you know, usually when a Fed hikes, the market leaps to the next move. Now this might be totally different and not a full hiking cycle like we've seen in the past because of the war and all these kind of one-off factors, but something to keep in mind.

8:23Yeah, I mean, that's why some are beginning to whisper about maybe the 10-year final destination is at six. You saw control group retail sales today. That's the highest in three years. It's not just supply shock. I mean, there is demand. There is demand going on. I've been telling you there's spending going on, even though the consumer confidence numbers look so dour. Well, it's nominal. I mean, how much of it is inflation-driven is a different story. Sure, but there was plenty of spending across the board. It wasn't just on gas stations, which I know factor into those numbers as well. And they're not inflation adjusted.

8:56There was online spending. A lot of the categories actually showed higher spending. And if you've listened to a lot of these conferences, I've highlighted some of the comments from the bankers. Demand is good. Spending is good. Consumer balance sheets and credit is good. And the quality has been pretty stable. So all of that, I do think, helps the Fed feel more confident that if they are going to raise rates right now to deal with inflation, there's not an immediate risk of wrecking the economy. Also, the market has done a lot of the work for them already. All right. For more on the markets, the Fed, who knows what else.

9:34Let's bring Dan Greenhouse, chief strategist, managing director at Solis Alternative Asset Management. An asset management firm that's an alternative, but you're a strategist. To what is always the question? I can't explain any of it, but we love having you here. I love being here. What do you make of Sarah's thoughts and what are yours when it comes to not just this afternoon, but the bigger picture? As usual, Sarah's right. Far be it for me to disagree. I think the one characterization I would disagree with is that I think most people think that they should be hiking rates. I hope everybody should be watching this show every day.

10:09But if they're not, that's a good thing, at least today, because I'm going to repeat everything that Stephen Myron said yesterday. I'm in the camp that thinks that they shouldn't be hiking rates right now. I think that's the minority position. I understand that. They probably will still hike rates. But I think for all the reasons that he articulated, I'll reiterate very quickly. You've got the war, the AI investment cycle, tariffs, a host of things that are skewing the numbers. When you look at the alternative measures that it sounds like Chair Warsh is ultimately going to favor, median CPI, mean CPI, trimmed means, they're all in the mid-twos.

10:43I don't see this surge of demand-led inflation that higher interest rates is going to curb. There's something you can do here to calm the market down. I don't want to say there's no reason to hike rates. I just think the preponderance of the evidence right now should be that they should be waiting. When you talk about the AI investment cycle, though, why carve it out? I mean, it's a key part of GDP growth right now. And obviously, it's creating a good amount of jobs and consuming an enormous amount of capital. And resources. So I don't mean to dismiss it as if it doesn't matter. What I mean is when you listen to Sundar Pachai or Mark Zuckerberg say, we're going all out and it doesn't matter.

11:23I'd rather overspend than underspend to characterize it. 25 basis points in additional cost of capital for them isn't really going to matter. The companies, as we've discussed in the past, are levered half a turn. So it's not as if leverage is some constraint. They're going. And so you're not going to slow that down. And then there's the second political question, which is, do you really want to slow that down given everything that's going on right now, the competition with China, et cetera, et cetera. So I don't mean to carve it out, such as I do mean to say these are things that are not materially affected by 25 or 50 basis points worth of rate ikes.

11:54And the underlying demand, I mean, look at, and again, Stephen said this yesterday, I hate to repeat everything he said, the economy is not growing gangbusters. Yes, obviously, there's a huge investment cycle, but non-residential structure investment has been a negative contributor to GDP every quarter for like the last three years. Residential construction has all sorts of problems, which are well documented. So it's not as if the interest rate sensitive sectors of the economy are booming and we need to calm that down, you have real weakness in certain parts of the economy. So I think they should.

12:23I'm not saying, again, there's no reason. I'm saying, hold on. For what? I would argue more evidence. So the Goldman Sachs argument that you just articulated about perhaps we're on our way back to a normal range of inflation, I think buys you another couple of months. Further evidence that you talk about we saw Walmart say we got all these tariff refunds. We're going to pass that through to Price. They're the most articulate of the companies to have said something like that. But others have alluded to it. So tariff-led price increases might fall by the wayside. At some point, God willing, we have a cessation to hostilities, and oil won't be$108, gasoline won't be, or diesel, I should say, won't be$6.

13:02So there are some things in the pipeline that you would hope would come to fruition. And I think a few more months, when you have missed your target for five years, isn't too much to ask for when you have a confluence of events working. That's the interesting twist, is for all this time, we're like, what, they're still above target, still above target. Now the thinking is, oh, well, it's been so long. What's another few months? Yeah, you know, I understand how that might sound to some. And I don't want to get too far into politics. But it is fair to ask, what is different now that after five years of missing your target, now there's this huge urgency?

13:34Obviously, there's been a little upturn in inflation that is different. But there is, you know. There's a new Fed chair. There's a Trump-appointed Fed chair, which also, I mean, Atlanta wage tracker, there's been a little curl. Sure. We got big wage hikes this morning at Amazon, one of the largest employers in the country. I mean, that would change your discussion. And again, I'm not saying there's no evidence. I'm saying there's enough evidence for me, if I were a voter, to wait another little bit. I think their best case for hiking, I think two reasons to hike. One, first of all, yes, wages aren't growing that fast.

14:09But the fact that inflation is eating into wages, that's not great. for people, and people feel that that's the so-called affordability challenge. And then also, you know, what's happening on the long end of what we saw with rates after they did not hike last time was that's really what spurred this sort of quick sell-off. Yeah, this is a very interesting conversation about if they don't hike, what does the 10-year do? We're never going to know the counterfactual, of course, but that's a good conversation right now. A 10-year, I think part of the problem with interest rates right now, we debate this at Sol's all time, Some of this is just a renormalization of interest rates after a third of the...

14:49I know, exactly. But rates don't necessarily just get back to trend. Oh, no, nothing's average. Right, right. You brought up the Deutsche Bank graphic before. There's no average cycle. What I will say is we're all old, Sarah, much less. We're all old. I think the numbers are like a third of Wall Street is under 33 or something like that, under 30. They've known nothing but zero percent interest rates as a catch-all. So an economy, nominal GDP growing what it is, a stock market booming the way that it is, et cetera, et cetera. Where should the 10-year be? I don't know that 5 % is the right answer.

15:26Maybe it's four, maybe it's six. I don't know. But I think a large part of this is an unwillingness of a lot of people to just come around to this is how it normally is. Thank you for including me in just to old and not older. I appreciate that. You have to remind audiences because you're so youthful. The moisturizing schedule, it's very impressive. It's really the hair for him. I'm happy to share it with you as well. Dan, thank you. My pleasure. Thank you, sir. Always appreciate your time. Dan Greenhouse. We do talk about skincare sometimes. A lot. Why not? It's important. It's important, 100 percent.

15:58All right, here's our roadmap for the rest of the hour. After the break, the pacing debate. We'll talk to Defense Department Undersecretary Emile Michael, who helped lead the Pentagon's blacklisting of Anthropic earlier this year about this industry push to slow down AI advancements. Plus why one industry is sounding the alarm on fuel, saying the spike in prices is radical, abnormal, and like something out of science fiction. And a lot more on the Fed ahead of what might be the first rate hike since 2023 in just a minute. Welcome to The Circle. In this game, you never meet the other players. Your goal is simple, become the most popular.

16:35But should you play as yourself or catfish as someone else? With the new host, celebrity contestants, and this time, audience voting will influence the game. You decide who has what it takes to win. Watch the Hulu original series The Circle on November 17th. Streaming on Hulu and Hulu on Disney Plus for bundle subscribers. Terms apply. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading.

17:17Download the latest episode and subscribe at schwab.com slash marketupdatepodcast or find Schwab Market Update wherever you get your podcasts. AI is here, transforming how we work, live, and lead. And the women I talk to aren't waiting for the future, they're shaping it. I'm Julia Boorstin, Senior Media and Tech Correspondent at CNBC. This is CNBC Changemakers, where I talk with the female leaders transforming business as AI reshapes the world. Follow and listen to CNBC Changemakers, Women Leading in the Age of AI, wherever you get your podcasts.

17:56Welcome back. Some news around late yesterday, this morning as well, about the possibility of OpenAI doing another funding round. Of course, a funding round as a private company prior to what is expected to be an initial public offering next year. I've been hearing this from a number of the company's large investors over, let's call it the last week or so, as a possibility, but very much unclear whether it's going to actually happen. If it were to happen again, been described to me by any number of different people as, well, would it be to create more liquidity as well for employees to sort of bridge that gap between, let's call it now or at some point soon, and an IPO that would come at some point next year?

18:39Or would it also be used to raise primary capital? It does seem at least possible that there'll be some conversation around this. If OpenAI does see significant demand at a valuation it's happy with, and I've I've been hearing$1.25 trillion, but it could go as high as$1.5 trillion. Again, I don't want to make too much of this. I chose not to actually do a story on it, in part because it didn't seem like something that was likely to happen, at least in the near term. That said, Sarah, as is often the case, there were others who made different editorial decisions. So I did want to try and put some context there around the possibility of it, which I won't dispute.

19:16There is that possibility, but it's not a go decision that has been made by OpenAI at this point. And some of it will depend on when they really do fix, not that they're going to be able to in the near term, when they'd like to go public. Because then you look at how much time, whether you need more capital. Remember, this is a company that raised$122 billion not that long ago. Also created about$6 billion in liquidity as well in July for its employees. But still looking at the length of time between now and a public offering could inform their decision as to whether to seek more money at a far higher valuation.

19:49Never seen anything like it, just in terms of the valuations, but also in terms of the money that they're able to raise in the private market ahead of their public debuts. I mean,$122 billion is still going to be more than they raised. Remember, that was more than was raised by SpaceX or Alphabet, Google, when they did that equity offering in the spring. Like the little window into your journalistic thinking as well. While this debate continues to rage over AI safety, It is intensifying at the Dreamforce conference in San Francisco this week, where Anthropic CEO Dario Amodei doubled down on his three-step plan to slow frontier research.

20:23Listen.

20:25Emil Michael: Let's make our practices better. Let's recommit transparency. Let's invest more in safety. Then let's organize the rest of the industry and say, what can we do to set standards for everyone? What can we do to make everyone's standards better? And then finally, there should be an international component to it. And that's essentially the three-step plan that I laid out in the essay, the first of which we committed to and the others of which we're going to have a dialogue with the rest of the industry about. And I think that's the way to lead the industry forward, to set an example, to say that everyone can always be better.

21:04Joining us now for a first on CNBC interview is Emil Michael, the Department of Defense's Undersecretary for Research and Engineering and Chief Technology Officer. He met with Anthropics Chief Compute Officer Tom Brown yesterday to discuss the ongoing debate. Emil, it's great to have you. So what did you guys discuss and how do you react to what Dario just said?

21:25Emil Michael: Well, we didn't discuss what Dario said yesterday. Just as you know, Sarah, we at the War Department and the government generally, we have a responsibility to evaluate all these models. The president had an AIEO a few months ago, which required us to kind of make sure we understand what the frontier looks like. But my comments on this pacing plan that Anthropic put out is nothing's stopping these companies from investing more in safety and slowing down their research projects till they ensure they're safe. That's what good product owners do. Whether it needs to coordinate with industry, that doesn't quite make sense to me.

22:06Yeah. I mean, what you you I feel like you buy into this effective altruism theory, which, you know, Shem Sankar from from the CTO Palantir wrote about the free press this week. But here's explain what this is and why it makes you skeptical about all this.

22:22Emil Michael: Yeah, I don't buy into it. I do think it's part of ideology that's really seeking control over A.I. governance. And Dario said it himself on TV that he believes the way AI should be governed because it's such a powerful technology is him, companies sitting with the president and the leaders of other democratic countries to essentially have a transnational governance regime that governs over the use of AI, which necessarily would disclude upstarts and would necessarily disclude open source and things that are not at the frontier. I think that's dangerous when you're thinking about that kind of new technology being concentrated in the power of a few people.

23:04Yeah, I should say you buy into that their thinking and their motivation. You very much do not buy into that clearly. I just wonder, you know, if this administration's approach is a little dangerous because at some point, I mean, and the fact that Elon Musk signed on to this as well, really, I think, made me think, OK, if the folks at the forefront of this are all worried about it and finding it dangerous, and should be controlling it? Like maybe, I get that they should be doing it on their own, but why is it wrong for government also to be involved in trying to put some guardrails on so that we don't make a huge mistake here for humanity?

23:43It feels like there's a lot at stake.

23:46Emil Michael: Yeah, first, I would say Elon softened his comments and said it was 4D chess because of the IPOs coming up for some of these companies. And maybe there's a relationship between some of their comments on pacing the frontier with their financial interest. But I do think people need to realize that we did have an AI executive order. When Anthropic put out a model that we thought was unsafe, they had export controls slapped on them within hours. We have a robust testing regime now, so we test what's at the frontier. And then you have Mark Zuckerberg taking the other side of the equation who said he delayed the release of Muse by a few months because it wasn't safe.

24:27Emil Michael: He didn't announce it. He just did it. So if you have a defective product, don't launch it, make it better. So, you know, whether regulations come in the future or not, but in the moment, I think we're doing what the president said we should do. And it's working. Amil, it's David Faber. I'm certain that you read the incident report, I would assume, on the hugging face incident from both OpenAI and MSTR. I mean, it scared a lot of people, certainly scared me, given I think we did learn some new things in terms of the capability and almost the consciousness. I hate to use that word, but of these of these agents.

25:03What was your reaction to that? How should we view that that moment in time, given it does seem to have sparked a lot of this current conversation?

25:12Emil Michael: Yeah, it's it's it's the right question. I read that extensively. I would say that it was in their testing environment, their testing environment, which is the same one the Anthropic uses from a company called Irregular, which has done a lot of these testing environments, clearly is not doing a good job because they're supposed to constrain what they're testing. Now, the escape by that agent that attacked Hugging Face is concerning. And it just shows to me they're not investing enough in that side of the equation. And frankly, Sam and Dario both said that. They said we're not investing enough in safety alignment and those sorts of things.

25:48Emil Michael: And they should be and have to because these agents can do goal seeking, what's called goal seeking. You set a goal and they use any means necessary to get there. They have to train their models not to do illegal or sort of destructive things to do that. But I think it's a matter of engineering, research and investment. I don't know what kind of regulation would stop that from happening. Yeah. Well, I mean, I think what struck people and what was most concerning was not necessarily just the goal, but the fact that they never communicated with their human masters and told them they were defying the original order, that they acted as a collective, 1 ,200 of these agents, that they spent most of their time trying to cover up their tracks.

26:26I mean, you know, that was the extraordinary part of it. And I do wonder, and it seems that there is real concern amongst some of the people training these models, that it's an experiment and you just don't really know what you're going to end up with.

26:39Emil Michael: Yeah, I think that's right. But I think, you know, with the 1 ,200, think about it as like 1 ,200 kids in a high school, they may need a hall monitor. Maybe they have the most powerful agent being a hall monitor that's taking the interest of the human developers and making sure. There's lots of techniques to get at this. I think what people should realize is that early stages of any technology, when I was at Uber, people thought Ubers were not safe relative to taxis. Now people think robo-taxis are not safe relative to Ubers. People have to understand there's a learning curve there. and there are ways around this, or they could just stop.

27:14Emil Michael: They could just stop some of these things until they figure it out. And this is the sort of tension you get between people who want to pre-regulate, like Europe, and those who want to hold companies responsible for good products being developed that are aligned and safe, not releasing them until they have those dimensions in them. Amil, if there are guardrails that protect us on the safety side, Does that necessarily mean that there's less promise on the productivity side? Is there symmetry there? I don't think there's, you know, it's an interesting question, Carl, because I would say that the models that I think Jacob Cox and the European who made that viral tweet about extinction risk and so on, I think they were looking at things that were two generations ahead in their lab that were not nearly ready for public release.

28:02Emil Michael: So I think all these labs or companies have new versions in the hopper. So they have a lot. And I think all of them say that the current versions that they have out there have a lot more capability that's not even being used yet. So I don't think yet we're at a tension where they have to be pushing these two generations ahead models into the marketplace that they're going to lose. Because there's still a lot of capability there. And Dario in his pacing letter did not say he was going to stop training new models. So that seems to be going continuously for all these companies. I guess that, I mean, the pushback and the struggle, we don't want China advancing.

28:39We don't want to slow this down and have them speed up and get ahead of us. But this whole notion that you guys seem to be endorsing, like the trust us, as Zuckerberg came out and said, and as you said, these companies can just do. I don't know. Like, can we trust? Do we trust them? You've questioned some of the motivations of Dario in the past. And Sam, are we going to put all our trust and humanity and a few of these people?

29:02Emil Michael: No, we're not. I do think it's dangerous. I think we're going to make sure that all the laws are enforced. There's a ton of laws on the book for the Federal Trade Commission, from sort of general liability laws that should constrain these companies to being liable if they do make a mistake or commit a crime or cause civil damages. I do think they should be doing independent auditing. Now, the meter company that Anthropic chose to do their auditing is not independent. That's funded by the same people who funded Anthropic and Sam Bankman-Fried. So I do think we could use a cottage industry of truly independent evaluators that help these companies evaluate what's happening without a commercial interest.

29:46Emil Michael: But that, again, has to be developed because that's a very unique expertise because some of these products are pretty complex. Black box, 13 trillion parameters. So there has to be some sort of industry that develops to monitor it. Well, I mean, Dario did say that in his pacing essay that he would want a third party evaluator. He also said that we should crack down on China, for lack of a better term. That's not his words, but I'm curious how you view that. Should they have access to the H200s or whatever chip we're allowing them to have? They may be doing distillation, Emil, of some of our models.

30:23How much should we be pushing back on China to try to stop their progress?

30:29Emil Michael: Well, to answer your first question, David, I'd say that third party does not mean independent. I'm talking about independent and non-aligned dollars. When it comes to China on distillation, I do think distillation is a problem. But again, when you get to distillation, you think, OK, I'm building this super powerful, super intelligent model and it can't figure out when it's being distilled. So it's sort of, you know, if you're building this thing that's better than humans, what are humans going to do to, you know, in terms of knowledge to stop distillation? When it comes to the chips, I think pretty President Trump has a pretty measured philosophy on this as a certain number of chips that are two generations behind, soon to be three generations behind the next NVIDIA chip.

31:13Emil Michael: that they're letting China use in some way to specific companies. And I think that's a measured thing. I think people are making too big a deal about what this might mean. And we're talking about the United States has 70 percent of the world's compute. So the number of chips, the H200s that are designated for China, is a small fraction of the world's chips. So I think I wouldn't overestimate how big a deal that is. Do you think there's a coordinated effort to lobby against or to lobby for AI regulation that somehow some of these whistleblowers are part of and that, you know, trace can be traced to members of Congress?

31:54Emil Michael: Oh, no doubt about it. The amount of dollars being spent in D.C. now directly and indirectly by this effective altruist movement. You could call it coefficient giving. You could call it some of these PAC groups that are being set up. I don't think the country's ever seen. And I think in the next few years, you're going to see more dollars poured into this sort of industry from a lobbying standpoint and to specific congresspeople and senators than we've ever seen before. And the promoters of some of these extinction death cult like philosophies are part of that effort. Now, is it a grand conspiracy or do they all just align and they jump on the grenade when they when someone throws it?

32:36Emil Michael: You know, I'll leave people a debate and we'll see how that plays out. But there's no doubt this is a coordinated campaign to scare people to make irrational decisions that benefit some of these incumbents. And then finally, you know, there is some talk about government stakes in these companies, even nationalizing them. Would you be open to anything like that? I hope not. I think that these companies, we want these companies to be successful. I mean, think about the numbers that Carl was talking about. 1.25 trillion, 1.5 trillion, 2 trillion. You're talking about potentially two of the top five biggest companies in the history of the world in America.

33:15Emil Michael: That's a good thing. We want others to come up alongside of them. We don't want government to get in the middle. That doesn't really go well in terms of nationalization. But let's hope they do the right thing. And become a normal company with normal companies, with normal products, with normal safety standards that they test and spend money on just like every good company does when they mature. These companies are three, four years old. They need a little more time to season, in my view, to understand how business really works. All right. Well, that's an ongoing discussion. We appreciate your comments on all this.

33:47I know you're on the front lines. Samil Michael, the Department of Defense Undersecretary for Research, Engineering, and CTO. Tomorrow morning, we continue the conversation with Palantir CEO Alex Karp. He's joining us exclusively at 11 a.m. Eastern to weigh in on all of this, the slowdown debate, the safety debate, the race against China. No surprise, he has very strong opinions on all of it. Yeah, so do some others. We're going to be talking to Democratic Senator Richard Blumenthal, responding to what we just heard from Michael, the senator demanding some answers from OpenAI and Sam Altman about its rogue agent attacks.

34:19And there is some fresh reporting on that this morning out of Reuters. We'll get to crypto down after the Clarity Act did fail to pass the Senate. Stay with us. Building a portfolio with Fidelity Basket Portfolios is kind of like making a sandwich. It's as simple as picking your stocks and ETFs, sort of like your meats and other topics, and managing it as one big, juicy investment. Now that's pretty good. Learn more at Fidelity.com slash baskets. Investing involves risks, including risk of loss. Fidelity Brokers Services, LLC. Member NYSC SIPC. Which NHL teams are scoring big off the ice? CNBC Sports' Michael Ozanian has the numbers.

35:04If a dive margin in the NHL is right there with the NBA. Official NHL team valuations. Revealed Friday in Squawk Box on CNBC. Time for a CNBC News update. Tom Chu has that for us. Tom? Good morning, David. Charlie Kirk's family is opening the door to a possible lawsuit against Utah Valley University, where Kirk was assassinated last September. They filed what's called a notice of claim today, which is required by Utah law, before filing a civil lawsuit against a government entity. In it, they say his death resulted from security failures that allowed a rooftop sniper to shoot and kill him. At least three people died when a helicopter covering news for NBC, L.A., and Telemundo crashed in Los Angeles Tuesday night.

35:50Authorities say the helicopter went down between two commercial buildings, killing two people on board and a third person on the ground. The helicopter was covering a fatal collision between an SUV and a city bus. And President Trump's third pick for Surgeon General is on Capitol Hill today for a confirmation hearing with the Senate Health Committee. Dr. Nicole Sapphire is a radiologist and former Fox News contributor. The confirmation of the president's last pick, wellness entrepreneur Dr. Casey Means, had stalled over her lack of qualifications and her controversial vaccine stances. Carl, I will send things back over to you.

36:26All right, Tom, thanks very much. When we come back, we'll get you ready for the Fed decision in just a few hours with former Atlanta Fed President Lockhart. Could this be the start of multiple rate hikes? We'll talk about it. And then next hour, don't miss early Google and Facebook investor Roger McNamee. why Roger says the game is about to end for the biggest AI players. In a minute. Welcome back. Traders on CalShare currently placing an 87 % chance of a 25 basis point hike from the Fed this afternoon. Our next guest sees reason for 50 as a way to front load the final inflation and avoid a controversial rate decision right before the midterms.

37:04Joining us this morning is former Atlanta Fed President Dennis Lockhart. Dennis, welcome. That's a little spicy. Do you expect this to be part of the conversation?

37:13Emil Michael: I don't know. I would hope someone would put it on the table in the meeting because I think there's a case to be made for front-loading what will have to be a series of rate hikes in order to have any effect on demand in the economy. So one way to avoid having to do anything on the eve of the midterm elections would be to front load with 50 basis points today and then pause until December. What would the case for that sound like? It would sound like the committee has concluded that the hope for disinflationary cycle really hasn't materialized. realize it's time to act. They want to act in a way that's actually going to have an effect on demand in the economy.

38:07Emil Michael: And therefore, we decided today to raise by 50 basis points. And it's just a strong statement after all of the rhetoric of a commitment to bringing down the inflation rate. I don't know. I don't even know if there's a credible case to raise at all because I mean, you could argue that core CPI is only 2.4 percent, that a lot of what is keeping inflation hot is a supply shock driven by higher oil prices, which theoretically should be temporary, and that the economy isn't showing classic cases of overheating, which is why the Fed would step in to slow things down. Yeah, I agree. There are a lot of opinions on whether a rate hike is needed at all.

38:57Emil Michael: The way I think about it is the narrative hasn't changed, and the CPI report of a few days ago really didn't change the narrative. And the narrative is they have had elevated inflation for over five years. The labor markets, the employment side of the mandate are stable and solid, and it's time to do something about a trend rate of inflation that is well above the target. And I think that's more of a strategic view of the question than it is a tactical view looking at the most recent data in detail. But does it help anything? I mean, I understand that there are high prices. You go to the grocery store.

39:44But to me, that's a cost of living problem, not necessarily an inflation problem, because inflation is the rate of change. And I feel like what we're feeling at the grocery store and what we're seeing is that we've had years of rising prices. And a lot of the inflation problem, though, has come down and has been fixed. So it's not obvious to me that the Fed can really do much about this.

40:09Emil Michael: Well, it depends a little bit on what inflation data you deem as most important. I think Kevin Morshin, his speech at Jackson Hole, talked about the diffusion to the number of components of the PCE index. More than 50 percent had been rising above 3 percent. That's one way to look at it. You're citing core inflation as another way to look at it. So there are a lot of different opinions. To me, it still remains the question of do we have elevated inflation above target and how long has it been above target? And is action called for? And I do think it's called for. Finally, on the pass throughs, we've been hearing from this past couple of weeks, some consumer products companies.

41:01Pricing is one of the last levers they have. They're going to start pulling it. Today, J.B. Hunt, for example, a big trucker, warning their guidance lower on diesel. Do you think stabilization in oil would be helpful at this point?

41:18Emil Michael: Stabilization will help the inflation rate because, as was just pointed out a second ago, it's the rate of change. So even if it's gone considerably higher than pre-war, if it stabilizes at$90 to$100 a barrel, then the inflation rate won't show it. But the price level will certainly continue to weigh on households in the country. Dennis, we'll see what we get and certainly the color around it this afternoon. I hope you'll come back on the other side. Always good to have you. Thank you, Carl. Dennis Lockhart. We've got much more ahead on the Fed decision, including a special edition this afternoon of The Exchange, which starts at 1 p.m.

42:00Eastern. And later, instant reaction with Double Line's Jeffrey Gundlach sitting down with Scott Wapner, as he always does on a Fed day, right after the chairman's remarks. Coming up on this show after the break, why Norfolk Southern says rising fuel prices are like something straight out of science fiction. Squawk on the street. We'll be back in a moment. Welcome back. Here are three big movers we're watching. First up, trucker J.B. Hunt falling after its CFO said Q3 earnings would be down 5 to 10 percent from the second quarter, saying they've seen, quote, some of the most radical and abnormal swings in fuel prices ever.

42:33And speaking of, the CFO of Norfolk Southern said the sharp rise in fuel prices was like something of science fiction, after saying he noticed$8 a gallon diesel prices on the way to a California conference. We're also watching Expedia. Morgan Stanley downgrades the stock to underweight. analysts, they're worried that the company has greater exposure to a potentially weaker consumer. Price target now at$235. And the optical networking companies, which have been hit hard over fears of a slowdown in the AI infrastructure buildout, they're rebounding today a bit. Sienna, Corning, Coherent, they're among the leaders right now on the S &P 500.

43:09And it was interesting. I went back and looked at those comments from Northbrook Southern. They were actually talking about how they're gaining share from the truckers because of those fuel prices, even though obviously rail uses a lot of diesel as well. Yeah. After this, a new report involving Intel potentially doing some manufacturing for SK Hynix and its high bandwidth memory. Well, it has options traders placing more bullish bets. We'll have that story next. Welcome back. A new report says Intel and SK Hynix might team up to produce chips in the U.S. Let's get to Oliver Rennick at Sebo in Chicago, see what the options market is saying.

43:47Hey, Oliver. That's right, Carl. It's a big deal between SK and Intel. It's got both stocks up, and options traders are quick to the punch. Chasing Intel in particular as the U.S. chipmaker trades back above$100 after its 200 % rally in the first half of the year was almost cut in half by last month's low. Intel options volume today is three times the 30-day average, and call buying is about two and a half times more than put buying. More than three quarters of the$100 million in premium was tied to calls. And among the 20 most bought contracts this morning, 18 were calls. The 100 strike right at the money got the most attention, but speculators also liked the 103 strike expiring at the end of today's session.

44:33It's a zero DTE, 50 cent contract that needs another 2 % rally into the bell. Appetite for SK Hynix is also bullish, but on about one-third the volume, which itself is testament to Intel's comeback, that it's now more popular among traders than SK, which had so much fanfare this summer. One interesting batch of trades in SK Hynix, though, was buyers of the 185 strike call, expiring Friday, which needs a 4 % gain from here, guys. Oliver, thanks. Really interesting action in the chips last couple of days. That's our Oliver Renek at SIBO. All opinions expressed by Squawk on the Street participants are solely their opinions and do not reflect the opinions of CNBC or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet, or another medium.

45:19You should not treat any opinion expressed on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Such opinions are based upon information Squawk on the Street participants consider reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. To view the full Squawk on the Street disclaimer, please visit cnbc.com forward slash Squawk on the Street disclaimer.

46:09market update podcast or find Schwab market update wherever you get your podcasts.