The Federal Reserve: a Renovation Report, an Inflation Tracker, and a Tale of Espionage 9/30/26

0:00I'm Mike McNerney, Equity Investment Strategist. Markets move fast. My mission is to provide market insights to our clients that help turn uncertainty into opportunity. Janice Henderson, investing in a brighter future together.

0:18Oh, look, you just got added to a meeting about coordinating another meeting to prepare for the pre-meeting ahead of the follow-up meeting, which will, of course, require a recap meeting. And then another meeting. Hit your booking point, book with Southwest, and enter airplane mode.

0:48Thank you very much, John. I'm Kelly Evans, and welcome to The Exchange. Let's begin with some breaking news out of Washington this hour. Megan Casella is here to bring us those details. Megan, some news from the Federal Reserve. Absolutely, Kelly. The Federal Reserve's Office of the Inspector General has just published its independent review of the Fed's building renovations, and it finds no evidence of criminal wrongdoing or of administrative misconduct among the Fed's board of governors in this project. What it does detail is a litany of management failures and bureaucratic issues that allowed costs of the renovations to escalate, and it puts the blame for those broadly on the Fed's board.

1:23But no individual Fed officials, including former chair Jerome Powell, are mentioned by name in the report. Now, here's the IG's key finding. Quote, while our report outlines numerous deficiencies in the management of the renovation project, resulting in our recommended corrective actions, we did not find reasonable grounds to believe that a violation of federal criminal law had occurred and did not identify violations of board policy, warranting an administrative misconduct finding. Now, remember, Kelly Powell requested this independent review back in July 2025. That was after the building renovations had become a political flashpoint.

1:57President Trump and his administration were accusing the Fed of mismanagement, questioning whether the project violated federal planning rules and accusing Powell of deceptive congressional testimony. Now, the report does not directly address perjury claims. That was not specifically part of the IG's mandate. But the IG did look at documents related to the testimony as part of this review, and there was no misconduct found, criminal or administrative. Looking at the numbers, the IG highlights the Fed board estimated in 2020 that the project would cost$1.3 billion. But as of 2026, the board approved budget had soared to$2.4 billion.

2:31It puts the blame for the cost overruns partly on inflation, as the Fed board has said, but it also blamed the board for not asking for a guaranteed maximum price for the project, not asking for more contractor bids for certain aspects, for significant design changes, and for not clearly allocating responsibilities for monitoring the progress. The report then closes out with a response from now Fed Chairman Kevin Worsh. it stated yesterday, Warsh outlines several steps that the Fed will be taking to follow the IG's recommendations. Those include naming the General Services Administration the new project executive, reviewing contracts to see whether services were fully received and if there are any areas for reimbursement, and then setting clear internal controls around budgeting and oversight for the future.

3:13And Kelly, formally, the Federal Reserve, declines to comment. I do love the irony of inflation affecting the cost of the Federal Reserve's building project. Anyone who's ever dealt with a project, okay, we see some of what's happening there. Quick follow-up question, Megan, we have Steve right here, so we want his reaction in some context as well. When they say they asked for an independent report, but it's from the Fed's own inspector general, how independent is this? They say that this was completely doing their own work here, that they did have cooperation from the Federal Reserve as far as documents, as far as interviews.

3:46Throughout the report, It refers to both documents and talking to officials. So they had the information that they needed, but they were doing things very separately from the Fed itself. And that's what Powell was asking for when he asked for this review. We should expect there to be more reviews, more auditing going on here. We haven't heard yet from the Justice Department, as this is just breaking in the last few minutes, as to whether the U.S. attorney, Janine Pirro, might return to any sort of criminal investigation. So we could see more here. But this was an independent review, even though it is the Fed's own inspector general.

4:15they're acting independently. All right, Megan, thank you. Megan Casella, as I mentioned, we have CNBC senior economics reporter Steve Leisman right here for some reactions. Steve, so what would have been kind of the most impactful to the least impactful outcomes here and any implications for the markets? I think the context here is necessary. Megan gave it a lot of energy in that report, but it's well to go back and recall what this was. This was an attempt by the president to remove the chair. And the chair had to go on and make a video statement saying, this was a pretext because I haven't lowered rates.

4:52The Washington attorney general launched a criminal investigation. This was a very big deal. And now it's kind of fritted out. It's a bit of a - Whatever happened to the criminal investigation? It was dropped by Jeanine Pirro for lack of any evidence. Okay. So then the only last step remaining would now be the says - This was the last beat of a very, very important moment in Federal Reserve history and the history Federal Reserve independence. And I just want to put that context in. In part, this is a rebuke of the president. In part, it does. President Trump, President Trump. And it does also buttress this idea that, hey, there were cost overruns.

5:27This should have been done better. I agree with you on this issue of irony. But let's turn to the thing that really matters right now is what does this mean for Jay Powell continuing on the board? Does it open up a seat? Oh, for the for the president to appoint somebody. Because Powell had said he was going to stay on until this was. One of the things he might have been staying for was this issue of getting this behind him. This would appear to at least clear that up, whether or not there are other reasons for him to stay. For example, blocking the president from having, I don't know if that's one of the reasons, but that could potentially be one.

5:58And who doesn't remember this moment from July? I mean, you know. Last July of 2025, when Powell and the president were standing side by side in that the under construction fed that the president showed up to, I guess, demanding information about, you know, what was going, why that why the overruns were what they were. My recollection of that moment was when the president called the economy hot. And I remember commenting that if you're the president and you want the chair to lower rates, don't call the economy hot. But but that was besides the point. The important thing there was Powell correcting the president on the cost of the renovation.

6:37I don't know if you remember that moment. That was a very big moment. The quick interaction. So this, I don't think it ends it, but it is a point in time here of this back and forth between the attempt by the president to have more influence over the Fed and the battle of Chairman Powell, Chair Powell, to keep that at bay. Then quickly, just to put a pin in it, you know, we always do odds of like a rate hike. I mean, where would you say this puts the odds before and after these findings of Powell leaving the Fed and giving the president a chance to name a successor to that? I thank you for putting it that way, because I can't I can't say definitively either way.

7:15I think it definitely increases the odds of Powell leaving. I think he has wanted to leave. I think he felt like he couldn't leave until this was behind him. If there had been criminal allegations or criminal referrals, it would have been a very different story. But at this point, I think this is a major hurdle that maybe kept Powell or keep Powell from leaving. I think this is now passed. And the president may have a new nominee for the Fed chair, for the Fed board. Right. But he'd have to step down first. He'd have to step down first. All right. Megan, thank you. Megan Costello bringing that to us.

7:44Steve, stay right there. Because while you're here, let's talk a little bit about what's affecting markets this hour. By the way, stocks are still broadly higher. Got the PCE inflation report in the morning. And we have Tom Simons from Jefferies here. He's their chief U.S. economist. It's great to have you back. Is there anything you want to chime in and add from your point of view about the significance of that Fed finding? Yeah, it's really interesting. It could end up bringing back maybe Stephen Myron to the board. I mean, he's been kind of sort of hanging around the periphery of the. If Powell steps down.

8:12Yeah, yeah, yeah. And I have no insight into that. I just found this out as I sat down here. So I haven't really thought about it too much. But I think that this was the last thing that he said because he was trying to prevent the DOJ from reopening the investigation. So this might be one of the hurdles that they need to clear before they say, OK, we're totally done with this. We're moving on. Be interesting. But I remember before this that the speculation was that he was very likely to leave before he decided to stay. Until this all happened. Megan is actually still over in Washington with some more on this story for us.

8:45Megan. Kelly, we just got a full statement from the Senate banking chairman. That's Tim Scott. He says here that he in April called for a full accounting of the egregious cost overruns and that today he welcomes the inspector's general report. He says, Inflation does not change the Fed's responsibility to manage its resources prudently and be accountable to Congress. This committee will continue rigorous oversight to ensure the Fed is transparent and stays focused on its mission. So, Kelly, not exactly absolving the Fed of any responsibility here, and noting, of course, the IG's report didn't absolve the Fed either.

9:16He's not here making clear whether the committee wants to do more, whether it will continue investigation saying the committee will continue rigorous oversight. So we'll see what that means in practice and whether we see any more hearings, anyone going to the Hill to testify on this. Hey, Megan, let's not forget there was an allegation of perjury here. And Tim Scott's statement reminds me that he was at the hearing and he did not hear perjury. None of the Senate, but this was a referral. I believe it was the budget director, Vaught, who originally brought that up with an allegation from a congressperson who wasn't at the hearing.

9:50So quick question. Did this report deal at all with that perjury allegation? It's an important question, Steve. What the report was clear about was that perjury was not the central focus of this. But it did review, the IG did review that testimony in doing this report and in doing this investigation. That was part of what it was looking at. The testimony and documents relating to the testimony. And it was very clear, no allegations, no findings of criminal misconduct or administrative. So from that, we can infer that it does not believe that Powell perjured himself when he was speaking about this.

10:24There was also some timeline laid out in the report, Steve. You know, part of what Powell was talking about was no new water fountains. And that was really no features. And that was really what the administration had seized on, not just in Congress, but the president himself, President Trump accusing him of possibly lying to Congress. Then what the report says is that those design changes were made before Powell testified, for one. and that they didn't necessarily change the cost estimates in any material way. No water features. OK. All right. Well, Megan, again, stay there if there's any further updates, obviously.

10:58Tom Simon's just made an interesting point about, you know, could this, if Powell does step down at any point in the next couple of years, would that pave the way for Stephen Myron's return to the board? Someone who, by the way, has been pounding the drum about the balance sheet again. I mean, some great pieces just looking at, you know, what do we do about it? Is there a problem? Isn't there? what should be the philosophy. So that and a lot of other things, it seems, are still on the table. Yeah. And, you know, I don't know Stephen personally. I'm not sure exactly what he's up to, you know, professionally at the moment.

11:23But I do know that it seemed like he didn't slide into some other very, you know, sort of front office role with the administration. So I wonder if maybe this is something that's been in the works, you know, sort of behind the scenes. But yeah, I mean, he still does a lot of active work on policy advisory and whatnot. And I imagine that he's still in contact with his old colleagues. So, you know, it would make sense that he's started keeping the conversation going. Yeah, as mentioned, all of this comes on a day when we got probably the most significant piece of data for the Fed, especially ahead of the next meeting.

11:52Steve, where are the rate hike odds for October now? Because what we learned this morning, I mean, on the face of it, if you didn't know anything about, you know, where we are, two tenths on core inflation is a very ho-hum result. That is not anything where you need to be pounding the table for Fed rate hikes like we have been because the officials themselves, until Williams had signaled that they felt the need to. I was going to give that context. It's a one-two punch here on the October Fed found futures. One was William saying yesterday, hey, we don't really have to do this in October. We do need another hike, but it doesn't have to be in October.

12:25So what happened yesterday is the odds of October fell and December remained high. It fell again today with the PCE report and December remains high. I don't know if we have that chart that I made here on the Fed probabilities, But you're down now to 39 percent probability of October. It had been as high as 70 percent. But you still have a 90 percent probability. Look at that. They're so good in the back there. 90 percent probability of the rate hike in December. So Williams had said we need another one. The average Fed officials forecasting another one. That looks to be the case. I had been surprised the market got so excited about October.

13:00I was never personally excited about October. The market kind of got frothy about it. I thought some more responses coming from Washington to what we just heard from the Fed. Megan, what's new? Kelly, the drumbeat continues. This statement now is from Senator Elizabeth Warren. She's the ranking member, the top Democrat on the Senate Banking Committee. And some some fiery words here. She says the inspector general confirmed that Trump lapdogs, U.S. Attorney Jeanine Pirro and Attorney General Todd Blanch have no basis to restart the president's witch hunt against former Fed chair Jerome Powell. The president should quit trying to fire Fed governors to cover up for his economic failures and instead stop his chaotic tariffs and end the war in Iran.

13:39She goes on to also put some blame at the feet of the Fed. She says, like Trump's ballroom and his planned 250-foot triumphal arch, the Fed has overspent and under-delivered on its renovations. Today's report underscores something I've long pushed for. Congress must act to improve transparency at the Fed, and Chair Wors should swiftly implement the report's recommendations. So a little bit of acknowledging the wrongdoing at the Fed and some mismanagement that did lead to these problems, but the clear part there saying there's no basis she sees in this report to restart what she describes as a witch hunt against Chair Powell.

14:08So it's important to put that context as well, Megan. As I recall, Janine Pirro did not say she wouldn't refile this case after she withdrew it, right? She was saying, I'm going to wait for this report. Now, this report, which suggests to me she has no basis, but just to be clear, Pirro did not close the door on refiling, as I recall. She did not close the door. In fact, she did the opposite. She quite clearly left it open and said something along the lines of, I will not hesitate to restart this investigation if and when it's warranted. She didn't outline, to my knowledge, what would require, what would meet that bar for her.

14:42And again, I expect that we'll hear from her before too long sometime today. I would imagine that. But so far, you know, the Democrats at least are saying there's no reason to reopen any sort of criminal investigation. Megan, thank you once again. And Tom, just to kind of not ignore the elephant in the room here. Every time I look at the bond yields, I'm just, again, felt feels like a slow motion train wreck or a car wreck or something, except with each passing day that nothing happens anymore. Right. But what is there going to be some more fallout? What how does it implicate or not implicate the Fed here?

15:16You know, I mean, like to think about the long end, I'm assuming. Right. Like, you know, I think it's just indicative of the fact that there's enormous potential for return on invested capital all over the markets. and the Fed, or not the Fed, the bond market, you know, the Treasuries just don't offer, no one wants to be risk-free. That's what I'm trying to spit at, right? There's no real reason to be piling into the risk-free rate when risk does so well. So I don't think that we're at the end of this. I would suspect we'll probably see rates kind of creep even a little bit higher into the end of the year until they get to a point where it really does start to break something in the economy more broadly.

15:47All right. So if that's true, and we just 5.3%, you know, we were 399 before the Iran war in February. Anyway, if there's no reason to be in the risk-free rate at 5.3%, then does it have anything to do with monetary policy? You know, there is an inflation component, right? I mean, I think that, you know, you can decompose a 10-year rate any way you like. And most of the ways that it's done don't show that the expected inflation is much higher than 2%. But if the Fed were to, you know, inspire a little bit more confidence in the markets and expectations were to come down to closer to 2 % or maybe even a little bit below, then, you know, you would be feeling a little bit more, you know, positive about owning real yield at these levels.

16:31It's just fascinating because we've seen episodes like when they did the big cuts in late 2024 and we saw the 10-year sell-off and back up a full percentage point. And that felt like it was a more direct response to those rate cuts. Yeah. You know, I don't know if anyone ever offered a compelling theory for what else could have been driving it back then. 2024 wasn't the same market with all the issuance from the hyperscalers and whatnot, right? I mean, like I was looking at that Trump and Powell clip from before. I remember that's the first time I can remember using ChatGPT to make an image. I wanted to make a little cartoon thing of them with the hard hats.

17:04And it's just fascinating thinking that we're just a little bit more than a year removed from that. And how much has happened. Exactly. And how far we've come. So is it true, though, that for the investing world, you know, a dollar of issuance from, I don't know, meta, has anything to do with demand for treasuries? And I still struggle with that. Yeah, I mean, like, it isn't the same investor making the decision, but it does kind of work its way through the chain where each marginal owner maybe prefers this over that. And I think that that's true also within treasuries as well, right? Like, there's something like$8 trillion in money market funds.

17:34And I think as we've been talking about these long-end buybacks and kind of swapping it out with bill issuance, there's this, I think, kind of misunderstanding that that's a free lunch, right? Like, there is not. That works across the treasury curve, too, that, you know, if investors weren't getting as good returns in the front end as they were, maybe they would stretch out a little bit further. That's a great point. Steve, I want to put a point on it because we'll see you next hour. Well, 532. Yes, we'll be anchoring together. 532 is the 2007 high on the 10 year. Wow. Let's put up the 10 year chart one more time.

18:03So we're at 530 now or 529 and change was the last I looked. We were 530. And then you got to go back to 2002 to find a higher yield. And I do think it gets to a point. Look, I don't know if I should say this, but there's a point where when everybody's selling, you ought to think about buying. There's so many columns about that this week. The Wall Street Journal interviewed like 15 different money managers about this to say, to effectively ask the question, why aren't you buying? Why shouldn't everybody be buying? Let me put it in economic terms to make it more complicated for you to understand.

18:37An economist, and Tom, just slap me when I'm wrong about this, would look at this in terms of real return. Now, you have to ask yourself the question, you know, have yourself a drink and get some popcorn and ask myself a question. Do I believe in Kevin Warsh's 2 % or not? Because if I believe in Kevin Warsh's 2%, I go home with 3-3 real today. Right, but to Tom's point. And I don't know when you last, Tom, went home with 3-3 real for taking no risk. Not in my living memory. Not in my living memory. So the way an economist would think about this, the way an investor would think about this is in terms of real return.

19:14In other words, I'm already accounting for inflation. I'm going to put three point. And let's say you were a 63 year old reporter who'd been doing this for 24 years. And you're thinking about, well, how I mean, why not tips? Why not munis? Why not IGs? We have to have my friend Mark on to talk about he thinks the the world is underinvested in inflation, protected securities. That's a different story. We can talk about that. And why should anyone worry about this when you're getting 18 percent of the stock market per annum? Well, that's the problem now, isn't it? You can believe in Warsh and you can believe in inflation.

19:43But do you think that monetary policy is going to derail what's going on in the risk market more broadly? Right. Is that the end such that that real return is the best opportunity that you're ever going to have? We're not there yet. Here's the other problem, though, if I could. I know we got to go. But look, you're not getting paid that much more right now to do the same thing in a two. And the two gives you the liquidity of not being. So maybe what you're looking for is. What's that? Or six month bills. Or six month bills. For that matter. Right. I was just using that example. Yeah. Maybe what you're waiting for is a steeper curve to take that jump and say, you know, I'm going to take a piece of this.

20:20But don't hit yourself when it comes back. And the next time you look, it's 4 % or 4.5. Because you had 530 on the table. Yeah. Don't get greedy. All I know is there was a 41-year-old anchor who thought that T-Bill and Chill was attractive two years ago, sat in that for six months going, what am I doing with my life? Well, everything else, the market's up 20%. The market's up 20%. That's the problem. Gentlemen, thanks. Steve Leesman. Of course, it's called the equity risk premium. Let's talk about that. Thank you. Coming up, Micron is set to report after the bell. The stock's still trading at seven times forward earnings despite being the fourth best performer in the S &P this year.

20:57The shares are about 15 percent off last month's record high. So what do you do into the print? We'll get the bull case next. Plus, President Trump touting AI self-regulation in a luncheon with tech execs at the White House yesterday. They signed an agreement he calls morally binding. We'll have those details and what else to expect from Washington on the SI front ahead. The Exchange is back after this. This is The Exchange on CNBC.

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23:2520 % off your first purchase, but enjoy free shipping on any U.S. orders over$75 and free returns. Have a great day. Welcome back and take a look at Micron. Fractionally higher, it reports after the bell. The stock's up 15 % in the past month and still up nearly 300 % this year, driven by that huge demand at high prices for memory chips. And despite the rally, the stock still trades at one of the lowest earnings multiples in the S &P 500. You can see it on your screen there, 7.3. So can it buck history? Really, that's what we're asking here. How much longer can it run? Let's bring in Srini Pagjuri to try to answer that.

23:59He's a senior analyst at RBC. Srini, this stock, as we hear time and again, trades at the lowest multiples, at the peaks of the cycle. And yet, I remember talking to Steve Awe, the incredible investor, about this a few months ago, and he was owning the chips, thinks there is something different going on this time. So what are the stakes? What are you expecting and what should investors do? Yeah, Kelly. So look, this cycle is already proven to be different. We're in the 14th quarter of this upcycle. If you look at the history, the last two or three upcycles lasted typically eight to nine quarters.

24:34So we could argue that, yeah, this is already different. But the question is, how long is this going to continue for? Our view right now is that at least through 2027. The demand supply is going to be in a good balance. We think pricing will continue to increase over the next four quarters. So we feel pretty good about it. At the same time, I know we have only a couple of hours before the print. As I said, the stock has done reasonably well in the past month. I would say the expectations aren't exactly low. So at this point, I don't expect the quarter itself to be a catalyst. But at the same time, we still like it you know, for the, as I said, you know, next, you know, four to five quarters, you know, given our view on demand and supply.

25:15I think what stresses me out as, you know, thinking through it as a hypothetical investor in Micron is the idea that if I get in, I have to know when to get out. You know, there's other stocks and maybe Apple's a good example where you feel like you could just get in it, lock it up, put it away, hope for the best. Maybe that's overstating it. But with Micron, it feels like you're on a roller coaster and it's a great right up, but you have to worry about when it turns, when they have to cut prices, when demand. And I don't know if that's now or a few years out, but just having to worry about that makes it feel like stressful.

25:47It is. And that's the reason it's trading at such a low multiple, right? But at the same time, you know, you look at the past cycles. There were times when the stock peaked in, you know, during the maybe a few weeks before the peak of the earnings. And, you know, there There were times when the stock peaked like six months ahead of the peak earnings quarter. So at this point, our view is that the peak earnings quarter is going to be sometime late 27, maybe even early 28. So we still feel comfortable owning at these levels and at these price points. Anything you'd add to that kind of from the demand side readings?

26:26You know, what are the latest data points that tell you just how long that cycle might be? Yeah, absolutely. Look, I was just in Asia talking to about 15 or so, you know, supply chain companies, and there is no signs of any slowdown in terms of AI spending. That's one aspect of it. And the other aspect is, you know, it's more secular. As we see the workloads within AI expand into inferencing and also agentic AI, we are seeing increased use of memory. You know, these workloads need a lot more memory than, you know, your typical workloads. You know, that's a secular trend that's going to continue.

27:03And then on the other hand, you have supply tightness because there is no clean room and the high bandwidth memory, which is used in, you know, AI, you know, takes up a lot of capacity. And then we're also noticing that, you know, the tools that are used to make DRAM, you know, in particular, EUV tools are getting tight. So that limits the supply growth. So overall, we do expect the pricing to continue to increase through this year and also into next year. Its stock has certainly impressed me, if nothing else, with its staying power this year. And it looked like it was kind of cresting and rolling over.

27:37And it's certainly found its footing. Srini, thanks so much. And we'll see what happens after the bell today and beyond. Appreciate it today. Srini Pajuri from RBC there. And also, don't miss an exclusive interview with Micron's CEO tomorrow morning. That'll take place around 9 a.m. Eastern on Squawk on the Street. Still ahead, Citadel's Ken Griffin weighs in on whether the market is too concentrated on AI stocks as he makes a splashy move with Carnegie Mellon today. We're back after this.

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28:42Talk to your doctor and explore what's possible. Or call 1-800-526-7736 to learn more about Trimphia and visit Trimphiaradio.com. Hi, I'm Roman Mars, host of 99 % Invisible. It's a podcast about all the thought that goes into things most people don't even think about. You're going to see stories everywhere. Follow and listen to 99 % Invisible wherever you get your podcasts.

29:27URI.com slash ARCH and get 20 % off your first order. Exclusions apply. Visit the website for full terms and conditions. Not only will you receive 20 % off your first purchase, but enjoy free shipping on any U.S. orders over$75 and free returns. Have a great day. Welcome back. We're just checking on the markets. We see the Dow lower this hour. The Russell slightly. The S &P is up 28 points right now, and the NASDAQ is leading the way. It's up 0.8%. Charles Schwab is set to close out its worst month in nearly two years as fears of AI disruption hit the financial services industry. And if you can't beat them, join them.

29:59Schwab today announcing a new AI-powered assistant named Charlie set to roll out next month. It can do everything from tracking transfers and payments to answering questions on balances and portfolio positions. Here's what the CEO told Squawk on the Street about where AI is being used right now. We're not just bringing AI to the everyday interaction. We're bringing AI to tax planning. We're bringing AI to financial planning. We have AI and trust in the states now that can analyze a plan, have a conversation with a family through one of our professionals. So AI is powering the breadth of our business and allowing us to put more money in our clients' pockets and make them feel more secure about their financial life.

30:37Elsewhere, speaking of AI, on the heels of his historic$3 billion gift to Carnegie Mellon University, meant really for the Miami campus, our own Sarah Eisen sat down with Citadel founder and CEO Ken Griffin, and he gave her an update on situational awareness. Well, situational awareness has had tremendous success since its origin. They have been very much front and center on the AI success story, a success story written often by alumni of Carnegie Mellon. As I said earlier, CMU number one in the nation in AI. Their portfolio levered exposure to AI stocks. There was a wobble in the market. There was a setback in the valuation of these businesses.

31:19Too much leverage, too much enthusiasm. they were forced to take a step back to liquidate part of their holdings to ensure their financial stability. Citadel played a critical role in that. We bought most of their portfolio. I was instrumental in that trade. We worked about 40 hours straight to solve the liquidity challenges at Situation Awareness, but we brought that issue to a solid resolution for both their limited partners and for the investors in our funds at Citadel. Giving some clarity to a lot of the rumors and reporting of what took place around then. Let's get to Julia Boorstin now for a CNBC News update.

31:54Julia. Kelly, British Prime Minister Andy Burnham says his government has, quote, strong indications that Iran played a part in the incident where five men were arrested near a base being used by the U.S. military to attack Iran. Five British men arrested Sunday on suspicion of explosives, offenses and planning an act of terror. They were released on bail a day later. After bipartisan opposition arguing would irrevocably change the surroundings, the Trump administration is reportedly considering limiting the scope of its border project in Texas's Big Bend National Park. According to the Associated Press, two court filings gave no details on its future plans, but said Customs and Border Protection is actively considering adjustments to minimize potential impacts.

32:41And Apple reportedly plans to make a long-delayed push into smart home devices next month. The first major move under new CEO John Ternus. Bloomberg reports at the center of the strategy is a smart home hub codenamed J490. Apple also plans to unveil the first update to the HomePod mini since the device debuted in 2020 and its first new TV set-top box in four years. Back over to you. All right. Still waiting for that duo in a couple of weeks. Julia, thank you very much. Coming up, AI names are leading the gains this session. Is this the trade to own into year end? Our next guest says yes. If you know where to look in the AI stack, this is one of the names he likes.

33:21Our mystery chart, no numbers. It's going to be hard to guess. You can still message me at KellyCNBC. We'll reveal it and where else he's seeing opportunity next.

33:32Welcome back. Tech stocks are broadly higher on that cooler than expected inflation data this morning. The Mag7, the software names like Adobe and Intuit, some of the big laggards, and agentic AI trades like HPE are all doing well today. Vince LaRusso is the CEO of Cloud Capital Partners. He's here to, you know, Vince, when I look at the charts, the markets just broadly lately, it's a little harder for me, maybe you can help me out here, to write the clear narrative of what's going on. What does the basket of trades doing well today signal to you? Yeah, hi, Kelly. I think what's happening here is the AI trade is evolving.

34:07I think the first stage of this was GPU was the shortage in the bottleneck, and you kind of wanted to own everything GPU-related, semis and memory. And on the other side, you wanted to be short everything that was software-related on fears of being disintermediated by AI. And I think as the trade, as the investment thesis evolves, you start to have more nuance. You want to look specifically within the AI infrastructure, where do we have bottlenecks today? We have to accept that some aspects of this are cyclical. We may have one of the longest running cycles we've ever seen and maybe high peaks, new peaks in memory and chips.

34:40But at the end of the day, what we're thinking about here at Cloud Capital today and looking at the moves is, you know, where do we see investable companies that are at the bottlenecks where they will have a return on invested capital well into the future, not just through this. And let me get to that. But I just I like where you started. You said stage one was long GPU short software. What is stage two or are we in stage three? What's the what is the trade that people are putting on right now? Because to me, I perceive something like long Mag7, long agentic AI. And I'm not sure what you're saying, but I can't even describe it.

35:15How would you describe it? I think we're even being more nuanced than that. I mean, Mag7 now is comprised of companies with different business strategies, different modes. I mean, I see Meta as one example of a company that's evolving. You know, you would have thought of that historically as a social company with, you know, generating significant revenues from WhatsApp and Instagram and Facebook. And it seems to us and to the industry that they're evolving into be the railroads, you know, to be the infrastructure. So I just think, you know, this is the benefit, I guess, of being a fundamental bottom-up stock picker at Cloud Capital as we get to do the work on individual companies.

35:44I think the broad brushstrokes are harder to apply here. You know, so I think we want to be in that infrastructure layer. And I think the markets are saying, look, some software looks really good, like cybersecurity. Others may, in fact, be disassociated. So I think it's a good time in the market. You know, maybe it's the middle innings, we'll call it, where you can be a little more tactical. I know you've been on the skeptical side, correct me if I'm wrong, with names like Adobe and Intuit. Those are some of the laggards. Even as the rest of the software space has caught up, those names have been 20 percent below their highs.

36:10And today they're seeing a bit of a bounce. I'm curious if, you know, again, going company by company, are they still to you in the disintermediated bucket? Are they moving? Are they on the mend? Do you have a point of view about which software stocks those and others are going to be rallying now? Yeah. So I think the question becomes, as we roll out this Agenda capability that you referenced, and we have Muse and others that are going to be able to kind of go through the tech stack and the software stack and say, what are users going to be able to integrate into their AI ecosystem? So then you begin to cut some of the services that you already have.

36:47So I think if you're a, you know, I've talked in the past about a seat-based licensing company like Adobe. You know, if you have a business model that's predicated on some number of users paying a monthly fee and all of a sudden, you know, AI is capable of delivering some of the same services, I think that is a company that could be at risk. You know, if AI can begin to do some of your taxes for you. But that integration doesn't mean that all software is out of favor here. I think the first market move was to sell everything software related. We happen to own a number of cybersecurity companies today long in the ETFs that I manage.

37:16And the view there is that as we have more endpoints, more agents, more identities, you're going to need more cybersecurity, not less. Yeah, and you can run through it. People can kind of look this up themselves. A lot of the names in those baskets. Where you're more cautious includes some of the financing names. Like you say, you want to own the toll road, not let it lend against it. It implicates Oracle, SoftBank, Blue Owl, and so forth. Late-stage consumer, maybe watch out there a little bit as well. I want to just close by asking you about Micron. How important is tonight's earnings report to a lot of what we think is going on with the entire AI trade?

37:49It's going to be very important. You know, I think memory continues to be a cyclical part of the market. And as I mentioned earlier, this might be an enormous cycle, right, with new peaks and it might be longer than we've seen. But if the market can begin to read return on invested capital, is demand specifically for high bandwidth memory, you know, as strong as we expected, I think that the trade continues. But I think it does become a little bit more nuanced. Some of the commentary around demand and growth expectations is going to be hard to reconcile with the stock price move. The stock has moved so much.

38:16I think the market will begin to discern more. But we're going to be able to take data points out of the earnings results and be able to extrapolate from that. Where is strength in this trade? Is there still a return on investment? I think to your point, Kelly, the financers of this are going to have some risk along the way. We're not going to land this perfectly smoothly. It's such a huge investment cycle. There's bound to be some dislocations. But if we can do the work and find the core winners that are the toll roads, collecting the fees associated with building out this infrastructure. We think they're going to have really good business models.

38:44And memory data points like we're going to get tonight are going to be informative in terms of the length and the height, ultimately, of this cycle. We've got to go. But I do like asking investors like yourselves. You're smart. You do company by company work. I don't know where the Anthropic IPO is. It's not here yet. It's almost October. But when it comes, presumably in a few weeks, maybe, would you be in it? We'll do the work. I mean, the team at Cloud Capital is going to say, look, this is one of the biggest investment cycles of our lives. This is one of the frontier model builders. And, you know, the valuation there is, of course, going to be stretched.

39:13But can you underwrite that with the really ambitious growth expectations that the market has? And, you know, the question, it's a great question, Kelly. The answer is maybe. I mean, at the right price, we'll look at anything. We just want to find that asymmetry between risk and reward. My early instinct on that one is it's going to be very expensive. So you're going to have to underwrite enormous growth. Exactly. In order to not just justify the price, but, you know, do really well in the very long long run. Vince, thanks so much. Appreciate it. My pleasure. Vince LaRusso with Cloud Capital. Coming up, a new CNBC documentary exploring how Chinese spies used love and betrayal to target the Federal Reserve.

39:48Details are incredible. We'll be right back. A new CNBC documentary details an aggressive plot by China to infiltrate the Federal Reserve. Eamon Javers joins us now. I guess you're the producer, the star. I don't know, Eamon. The The details of this are incredible. What can you tell us? Yeah, Kelly, as we dove into this, it just got wilder and wilder. The case of the alleged Chinese spy at the Federal Reserve shows us just how important the Fed is as a target for Chinese intelligence. Beijing is so eager even for really basic information about the Fed that one Chinese intelligence official was allegedly willing to spend more than a decade worming his way deep into the personal life of a senior Fed economist named John Rogers.

40:34Now, we've obtained exclusive photos, text messages and audio recordings detailing the whole case. But I want to play you just one snippet. Now, this is the man accused of spying for China inside the Fed, John Rogers, talking to investigators from the Federal Reserve's inspector general's office. He's talking about his relationship with the alleged Chinese spy. And listen to just how close he was personally with this man. I love the guy. Don't get me wrong. I do. I owe everything to him. The relationship, my wife wouldn't have happened despite the fact that we met online. It just would not have happened without him.

41:10And I love him like a brother. I actually asked him to be the best man. And he said, dude, your brother is here.

41:20But I thought it was weird at first. And then listen, as federal investigators press Rogers, the Fed economist, on his interactions with this alleged Chinese spy, What's incredible here, Kelly, is that Rogers acknowledges that the Chinese are eager to learn about the Fed. He says they do conduct espionage, but then he dismisses the idea that he himself could be the target of spying. And that's exactly what the U.S. government said was really going on here. So you think his generosity and kindness was genuine? Totally genuine. Look, there's something in it for them, too. too. But, you know, and I did have to be careful about my role in the Fed.

42:00And boy, the Chinese are watching everything that the U.S. does. I don't mean that in an espionage way. I'm sure they are doing espionage, but I don't confront that. They just want to know what's the Fed thinking. Now, the whole thing fell apart because at the same time that Rogers was allegedly being targeted by Chinese intelligence, he was also caught up in a sextortion case with hackers in Africa threatening to send nude selfies that he took on his Fed cell phone in the Fed's gym to the vice chairman of the Federal Reserve. But Rogers' defense attorney argued at trial that he never knew anything that was all that secret about the Fed anyway, and he never did anything wrong at all in his interactions with the Chinese.

42:44In fact, a jury agreed with that argument and acquitted Rogers of a charge of espionage. They did convict him in the end, though, of lying to federal investigators. It is a wild story, Kelly, and there's a lot more to it, which we lay out in the full version of the saga, which is on CNBC.com right now. You can see the QR code. Click on that. You can go right to the story with all the details. So he was innocent of actually sharing any sensitive Fed information with this Chinese. It was a Chinese male, a friend of his? A male Chinese intelligence officer befriended Rogers and then over the course of years became the intermediary between Rogers and his second wife, a woman who lived in Shanghai, who he met online.

43:30She didn't speak English. He didn't speak Chinese. And it was the Chinese spy in the middle of this sort of love triangle who kind of communicated back and forth and translated for them in many occasions and also just sort of mediated their whole relationship. It's really incredible how personal the spy got with this economist. And the allegation was by the federal government that he then became a spy for the Chinese recruited by this Chinese officer. His defense was nothing he actually sent was all that secret. What did the Chinese actually get access to in this case? Well, that's the real question here.

44:08Part of the big hole in the case for prosecutors was that in the course of all of this, they set up what they called classes in which Rogers, who was an academic, would teach courses in China on high level economics and the Federal Reserve. Those classes just happened to happen in hotel rooms in Beijing with just two or maybe three people present at night. and two of those people were Chinese spies, right? So he was teaching these courses, and the federal investigators, the FBI, doesn't really know what happened in those hotel rooms because the FBI can't operate in China. So they couldn't bug the hotel room or do any of the things that they would normally do to try to really prove this case.

44:48So there's a big hole in the case, which is what actually happened in those hotel rooms. But what they do say is that Rogers transmitted a number of documents to this spy and also transmitted a document that he lied about to an academic in China. And they say that was enough to charge him. The jury, though, didn't buy that argument. Well, it shows the lengths which China is going to. And I remember your story about Russia from a couple of years ago and some of the espionage there, Eamon. So, you know, companies shouldn't sleep on this, that there could be, you know, actors from other nations with these motives, you know, trying to gain access to this information.

45:24You can watch the whole thing, as we mentioned, of Eamon's new documentary. And Eamon, thanks for joining us to talk about it. You bet. Eamon Javers in Washington. Coming up, the biggest names in AI signing a voluntary agreement with the president to self-police their technology after yesterday's lunch meeting. We'll get you the details of that pledge next.

45:46They're assigned an AI agreement with the president yesterday at the White House. President Trump says it's morally binding. What does that mean? Kate Rooney has more in today's Tech Check. Kate? Hey, Kelly. Well, as you mentioned, some of the biggest AI CEOs and leaders in this industry yesterday gathered at the White House to sign this new voluntary safety framework. Leaders from Anthropic, Meta, Google, NVIDIA, XAI, OpenAI as well agreed to self-policing and oversight for the most advanced versions of this technology. It includes internal safety and independent outside audits. President Trump also rebranding this artificial intelligence AI as we know it to SI, superintelligence.

46:28Trump called the agreement morally binding and said that the industry would largely be policing itself. And for now, there is not going to be any new government regulation from what we're seeing, but the AI companies like OpenAI and Anthropic have increasingly started disclosing some of the issues that they've had, especially after the high-profile hugging face incident. Here's what Sam Allman, CEO of OpenAI, told me about that yesterday at their developer day. AI has to be built for people. It has to be good for people. Part of that is it has to be safe. It has to be always under human control.

46:59It has to do what people want. And you want to be able to use it and be confident that nothing bad is going to happen. As the models have gotten more capable, the safety cases that we now use have to be held to a higher and higher standard. In the meantime, Kelly, a lack of regulation doesn't necessarily mean there's no legal enforcement. The FTC is now opening a broader probe into AI companies, including OpenAI and Anthropic, and looking at whether they can be held responsible if and when autonomous AI agents cause consumer harm. Altman also told us, I should say, that he does expect a new liability framework around this technology, Kelly.

47:37Meanwhile, I want to try out America.gov. It looks kind of cool. I can't believe what I'm saying, but I wasn't even here yesterday, and it was almost like I missed a launch event, not from Apple, but from U.S. government, which I did not expect. I know, their own Dev Day in D.C. I know that was kind of cool. Kate, thank you, though, Kate Rooney. By the way, David Sachs, the co-chair of the President's Council of Advisors on Science and Technology, will be on closing bell overtime later today. That's at 4 p.m. No word on the A.I. Zariot, I don't think, the new one anyway. That's it for us. Thank you for watching, and I'll join Steve Leisman for Power Lunch right after this quick break.

48:08We will be speaking with HPE, their CFO, next hour. Our shares are one of the best in the S &P today and a first on CNBC interview. Stay tuned.

48:23Hi, I'm Roman Mars, host of 99 % Invisible. It's a podcast about all the thought that goes into things most people don't even think about. You're going to see stories everywhere. Follow and listen to 99 % Invisible wherever you get your podcasts.