Kevin Warsh Testifies, IBM’s Warning, and the Incredible Shrinking AI Model 7/14/26

Summary

The Exchange — July 14, 2026

Podcast: The Exchange
Host: Kelly Evans, CNBC
Episode: Kevin Warsh Testifies, IBM’s Warning, and the Incredible Shrinking AI Model
Date: July 14, 2026

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Episode Overview

This episode dives into a pivotal day for markets and policy:

• Federal Reserve Chair Kevin Warsh’s first congressional testimony and his vow to tame inflation
• A surprise drop in CPI (Consumer Price Index) inflation, reigniting speculation about potential Fed rate cuts
• IBM’s worst trading day in nearly four decades after shock earnings guidance
• The knock-on effects for tech and AI — including the emergence of smaller, more efficient AI models
• Banner earnings from major US banks
• Key insights from former Fed officials and leading analysts

The show brings together real-time analysis, expert commentary, and exclusive technical scoops, offering listeners a comprehensive look at the state of the US economy, tech, and markets.

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Key Segments & Insights

1. Market Mood: “Super Core” CPI Surprise & Fed Watch

Guest: Steve Liesman, CNBC Senior Economics Reporter
Time: 00:45–05:24

• Super Core CPI (excluding volatile items) dips below 1% annualized (last 3 months):
  • "Super core inflation is running below 1% over the past three months, annualized." — Kelly Evans (00:45)
• Kevin Warsh’s first testimony as Fed Chair:
  • Firmly promises price stability and pledges Fed independence from President Trump.
  • "If the president publicly pressures you to pursue a different course...will you follow the president’s wishes or follow the data?" — House Democrat (02:22)
  • "My commitment to you is to follow the law and follow the data, follow our very best judgment." — Kevin Warsh (as paraphrased by Greg Epp, 02:40)
• The Fed Chair avoided signaling future rate moves; hawkish prior comments from Governor Waller now seem “poorly timed.”

Memorable Quotes

• “He definitely has the best hair, that's for sure.” — Steve Liesman, joking about Warsh’s uneventful testimony (03:59)
• “When he's asked about how do you fix employment, he says you get inflation right… He really wants the Fed to focus back to where it was before, which is stay away from fiscal policy, stay in its lane.” — Steve Liesman (04:09)

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2. Fed Panel: Reading Between the (Communication) Lines

Panel: Claudia Sahm (New Century Advisors), Greg Epp (WSJ)
Time: 05:24–11:56

• Claudia Sahm:

  • Praises the steady tone, but notes lack of detail on data reliance:
    "[Warsh] really doesn't want to talk about that [economic outlook]. So I mean I think that was kind of for me a shift to not hear a discussion of the data for a data driven Fed." (06:38)
  • "11 months of a good CPI is not going to radically change the conversation...all things are on the table." (06:00)

• Greg Epp:

  • Points out a divergence between CPI and PCE inflation:
    • “The CPI has been very good for the last five of the last six months. It's the PCE number that’s been bad and weird.” (07:34)
  • Sees no strong case to raise rates this year, but also no urgent case for cuts.
  • On Warsh’s reticence: “Almost nothing. That's why it was kind of a disappointment right now...he seems to want to give as little information on the outlook as possible.” (08:49)
  • Interesting comment on Fed balance sheet preferences: transition towards Treasury bills, maintain ample reserves.

Quote Highlight

• “He said we're not going to declare victory because of the good CPI number." — Greg Epp (09:04)
• “We got to do more than just words here." — Claudia Sahm, on transparency in Fed decision-making (11:44)

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3. Historical Fed Chair Patterns & Market Takeaways

Guest: Sam Stovall, CFRA Chief Investment Strategist
Time: 11:56–16:49

• Every Fed chair in the past 50 years has started with a rate hike—but Stovall bets this time is different:
  • “The Fed probably will not be raising rates sometime this year...They're probably done cutting rates at this point.” (12:27)
• Market Context:
  • S&P performance “treading water” despite Goldilocks economic indicators
  • Bank earnings robust; technology/semi sectors delivering massive growth, but increasing talk of sector rotation
  • On tech valuations: Tech is not expensive, and may be undervalued on a relative basis.

Quote Highlight

• “We’re probably going to tread water for a while.” — Sam Stovall (12:27)
• “It just doesn’t get any better than this.” — Sam Stovall, on tech/semiconductor earnings (13:33)
• “Any kind of ... perceived trip up could end up triggering an awful lot of profit taking.” (15:54)

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4. IBM’s Catastrophic Earnings Miss & “AI Paralysis”

Guest: Brent Thill, Senior Analyst at Jefferies
Time: 18:41–24:01

• IBM plunges nearly 25%:
  • Weakness in software sales; customers are shifting AI budgets from software towards hardware, especially memory.
  • CEO Arvind Krishna: “This quarter, we faltered. We did not adapt and move quickly enough.” (18:41)
• Brent Thill diagnoses three headwinds:
  1. Delays in “big capital investments” (mainframe)
  2. “AI paralysis” with CIOs freezing spend and experimenting
  3. Security priorities overtaking software upgrades
• IBM’s issue is mostly company-specific, but many names may feel software budget pressure as dollars get redirected to AI

Notable Quotes

• “It was a miss on the mainframe... If you’re a CIO, you’re facing all these price hikes across infrastructure...you make the investment in the other area.” — Brent Thill (19:20)
• “Software as has been a source of funds for the past year and we don’t see any let up.” (20:12)
• “They have to do a better job managing the elephant deals and making sure they have a lot of antelope deals.” (23:08)

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5. Bank Earnings Bonanza: The Goldilocks Rally

Coverage: Kelly Evans, Thomas Hoenig, Jamie Dimon, Brian Moynihan
Time: 25:31–27:52

• Goldman Sachs: Best day in over a year; equities revenue up 72%, deal pipeline robust.
  • CEO David Solomon: “We’re in a technology super cycle...there’s enormous demand for capital formation. We sit at the center of that.” (26:11)
• BoA & JP Morgan: Also strong, with record profits, especially benefiting from investment banking and consumer strength.
  • Brian Moynihan: “Consumers are in pretty good shape.” (26:40)
  • Jamie Dimon: “A very healthy, active, exuberant market with very high prices and very high volumes.” (27:19/27:25)
  • Note: Dimon says AI has enabled up to 40% job cuts in certain bank roles.

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6. Fed Retrospective: Past Presidents Grade Warsh

Guests: Patrick Harker (ex-Philadelphia Fed), Thomas Hoenig (ex-Kansas City Fed)
Time: 31:03–37:20

• Harker:
  • “I actually thought Kevin did quite well in the focus on inflation... Although you can’t forget the other part of the dual mandate... The economy is broadly stable and growing, there is an underlying fragility that I worry about.” (31:33)
• Hoenig:
  • “He's insisting they're going to take care of inflation, but he didn't exactly explain why he's waiting for his task forces... He's fairly optimistic, though I do agree ... the economy right now is a little more fragile than we are acknowledging.” (32:26)
• Both agree Warsh’s focus on “first principles” means price stability first, with less reliance on the Fed’s balance sheet except in emergencies.
• Communications:
  • Warsh’s plan not to communicate as much is risky—“If there’s a vacuum, people fill it.” — Harker (35:37)
  • Press conferences: Surprising the market with unpredictable pressers could create volatility.

Quote Highlight

• “Paraphrasing Mike Tyson, everybody has a plan until the next crisis happens.” — Patrick Harker (33:57)
• “If they use [waiting on task forces] as the explanation, I think that will undermine their credibility.” — Thomas Hoenig (36:07)

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7. The Incredible Shrinking AI Model: Hardware, Memory & Apple’s Next Move

Guest: Mackenzie Sagalos (CNBC)
Time: 38:21–40:44

• Apple’s AI Bet:
  • Testing a new ultra-compressed AI model from Prism ML, based on Alibaba’s open-source Qwen, shrunk from 54GB to under 4GB—can now run on iPhones (15 or newer).
  • “Their tech cuts memory needs by up to 15x while also making the model faster and more energy efficient.” — Mackenzie Sagalos (39:30)
  • If widely adopted, could drastically cut industry-wide memory and GPU requirements, potentially undermining the “AI memory trade.”
• Broader Implication:
  • Raises questions about how much DRAM/data center compute future AI applications will need.
  • Recalls earlier market shakeups, like Google’s Turboquant paper tanking Micron’s stock.

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8. Muni Bond Innovation: Tech Enters Public Finance

Guest: Jennifer Johnson, Franklin Templeton
Time: 41:55–45:09

• Alphabet’s Muni Bond Move:
  • Google invests in prepaid energy bonds to secure discounted energy for data centers, a first in the tech sector.
  • “Bonds have been around for decades...This deal you’re referring to is the first time a tech entity... came to the market to try to take advantage of this low cost borrowing opportunity.” — Jennifer Johnson (41:55)
• Such collaborations could help offset environmental/resource concerns as states push back on new data center permits (see: New York’s proposed moratorium).

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Additional Timestamps for Fast Reference

• 00:45–02:02 — Opening market scene, intro to CPI and Fed Chair Warsh’s testimony
• 05:24–11:56 — Roundtable on Fed policy and data communication
• 18:41–24:01 — IBM and the shift in enterprise AI/software budgets
• 31:03–37:20 — Ex-Fed presidents analyze Warsh’s first testimony
• 38:21–40:44 — Apple’s AI strategy and the “incredible shrinking model”
• 41:55–45:09 — Alphabet’s foray into muni bonds, discussion of data center finance and regulation

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Memorable One-Liners & Quotes

• “It just doesn’t get any better than this.” — Sam Stovall, on peak tech earnings (13:33)
• “Almost nothing. That’s why it was kind of a disappointment right now.” — Greg Epp, on Warsh’s answers (08:49)
• “Paraphrasing Mike Tyson, everybody has a plan until the next crisis happens.” — Patrick Harker (33:57)
• “Software as has been a source of funds for the past year and we don’t see any let up.” — Brent Thill (20:12)
• “If they use [waiting on task forces] as the explanation, I think that will undermine their credibility.” — Thomas Hoenig (36:07)

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Episode Takeaways & Themes

• Fed policy is at a crossroads: With inflation dropping and uneven macro signals, the Fed Chair is playing it safe—yet markets want more clarity.
• The AI/tech capital cycle is shifting: Legacy software comes under pressure as AI spending reroutes dollars; meanwhile, foundational hardware bets (semis, DRAM) could be blindsided by rapid advances in small-form-factor AI models.
• Banks are booming: But analysts warn of fragility beneath the surface despite healthy earnings reports.
• Wall Street and tech are innovating together (Alphabet’s muni bonds): These creative financing mechanisms may signal a new phase in public/private infrastructure and energy collaboration.
• Communication matters: Warsh’s preference for radio silence over “forward guidance” could leave markets—and Congress—demanding more.

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This comprehensive episode gives a real-time pulse on economics, policy, and the powerful crosscurrents of tech and markets at a moment of inflection for all three.

Transcript

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[Greg Epp]

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You got this?

[Claudia Sahm]

Yeah, I do.

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[Kelly Evans]

you're listening to the Exchange. Here's today's show. Thank you very much, Scott. Kevin Warsh vows that inflation will be a thing of the past as CPI comes in light. And President that Trump backs off of his 20% fee on the straight of Hormuz. I'm Kelly Evans and welcome to the Exchange. You can see the S and P there is fractionally higher right now. Super core inflation is running below 1% over the past three months, annualized. We'll get reaction to that. And Kevin wash his first testimony on Capitol Hill from Claudia, Sam and Greg, if they'll join us shortly. Plus, oil prices are stabilizing after Brent hit $85 a barrel overnight. Does all of this put rate cuts back in play? And shares of IBM having their worst day Since October of 1980? What they said about their corporate customers and what does it mean for other software stocks that had been on a comeback? Brent Thill weighs in on that shortly. But let's begin with this sudden change of tone on the inflation front between this morning's CPI showing a drop in core prices. You can see that bar right there. It's going to the downside. And Kevin Warshaw's comments on Capitol Hill. Senior economics reporter Steve Liesman joins us with the latest. And boy, Steve, do those Waller comments look more ancient than ever after the events of today,

[Steve Liesman]

perhaps untimely would be a good word. Kelly. Fed Chairman Kevin Washing his first congressional testimony, firmly promising the central bank will deliver price stability. And he was upbeat on the US Economy and the promise of AI. And under repeated questioning from Democrats, he pledged independence from President Trump in the making of monetary policy.

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If the president publicly pressures you to pursue a different course than the one you believe is in the economic that you believe the economic data supports, will you follow the president's wishes or follow the data?

[Greg Epp]

My commitment to you is to follow the law and follow the data follow our very best judgment.

[Steve Liesman]

Wash repeated his promise for regime change at the Fed talking about his five task force do very communications to the balance sheet said there's more work to do on inflation in response to a question about this morning's inflation report said the labor market is resilient and he focused on the balance sheet reducing that and the duration of the balance sheet overall. WAR stayed away from providing any hint about the direction of monetary policy. He was helped of course by a lower than expected CPI this morning didn't have to talk much about it. The probability of a Fed rate hike in September20 dropping to around 61% from 72% before the CPI report and washing his testimony became public that remains remained elevated. But down from the surge yesterday after what Kelly mentioned those very hawkish comments from Fed Governor Chris Waller that do seem poorly timed. Warsh did not affirm any need to consider rate hikes. But then again Kelly he didn't talk much about rates at all and wasn't asked much about it.

[Kelly Evans]

Just Steve, what you know, as you know you've seen so many different Fed chairs come and go, so much different political pressure put on them from whether the President or the did anything in particular stand out to you or feel to you like the big takeaway from his appearance today and we'll get day two tomorrow?

[Steve Liesman]

Well, he definitely has I think the best hair, that's for sure.

[Kelly Evans]

And if that's the biggest news, he probably achieved his goal of not making any news today.

[Steve Liesman]

No, I just thought I would take a shot and a self deprecating shot I guess is the best way to put it. But I do think this kind of underlying hawkishness of Kevin Warsh did come out and when he's asked about how do you fix employment, he says you get inflation right. So and he wouldn't sort of bite on any of these other questions about you know, inequality and that sort of stuff. He really wants the Fed to focus back to where it was before, which is stay away from fiscal policy, stay in its lane. He talked a lot about and back to this notion of first principles. I must admit I'm not sure what exactly those first principles are, but he talked a lot about Alan Greenspan and getting back to a time I think when the Fed communicated last and he's relying a lot upon these task forces. So I would say that I think he has this underlying hawkishness, although of course he embraces this promise of AI. I think it was significant that he talked about the gains being something more down the road. So maybe backed away a little bit from the congressional test, his nomination hearing where the sense was maybe he would incorporate those gains earlier on. But he seems to be saying, you know, those things are going to come and it was upbeat, by the way, on the job prospects when it comes to AI.

[Kelly Evans]

All right, thank you Steve for now. Appreciate it. Steve Liesman, let's get some more reaction now from our opening panel. Claudia Sahm is chief economist at New Century Advisors and Greg Epp is chief economics commentator at the Wall Street Journal. It's great to have you both here. Claudia, we were just talking about, you know, how solid was the case for hikes. I know in your note you talked about the minutes that we got and how they themselves there was a camp that could see hikes, a camp that could see cuts after his testimony. And the CPI today, do you think we're going to start talking about the possibility of rate cuts again even as Warsh kept emphasizing his underlying hawkishness, like Steve was saying.

[Claudia Sahm]

So I think, you know, all options are on the table. 11 month of a good CPI is not going to radically change the conversation. And Walsh was also clear today and said that was not a mission accomplished cpi. It was good news but not mission accomplished. So I think all things are on the table and that was certainly in the minutes of the scenarios that were talked about. In the hold scenario it had and eventually cut as an option. So I think the committee is considering all of that, though I don't think a cut is imminent at any point. Inflation is still quite elevated.

[Kelly Evans]

And what did you make overall of his appearance day one of this today? Do they still call it Humphrey Hawkins?

[Claudia Sahm]

Claudia I do, yes. I mean that's what it comes from. The Humphrey Hawkins hearings. I thought it was a, it was a good first showing. You know, he's a brand new chair. He came and explained a lot of his ideas, his big picture. You know the thing that I felt was kind of missing from today's discussion was any kind of talking about the data. What do we see with inflation? You know, when push to kind of asked about his economic outlook, really doesn't want to talk about that. So I mean I think that was kind of for me a shift to not hear a discussion of the data for a data driven Fed. But this is, this is a clear choice that he is making in his communication and we'll see how it plays out.

[Kelly Evans]

Greg, jump in here. How would you interpret the latest data? Look, the super am I correct? The super core cpi, you strip it all out this is supposed to be the more important. The stickier one is running at point 75 on a three month annualized basis.

[Greg Epp]

The CPI data are great, Kelly. I mean this is not. I know they say that one number should not make policy one way or another, but this isn't just like one number. The CPI has been very good for the last five of the last six months. It's the PC number that's been bad and weird. So we have PC inflation running well above CPI inflation, which is the reverse of the normal situation. One way or another those numbers are going to converge. I'm starting to put my chips on saying PC converges back to CPI inflation. If I'm right, then there's no 5 alarm fire here. There's no case for raising rates this month. I don't think there's much strong case for raising rates at all this year. I'll just come right out and say it now, does that mean they need to cut rates? No, there's nominal GDP is very strong. Financial conditions are very loose. It's not an economy that's crying out for monetary relief. Maybe you could make a case that where rates are right now is roughly around neutral. But the CPI number I think today has got to make you stop and think maybe the PC data because of a lot of weird stuff in the way it's measured and because of excessive sensitivity to a few categories like software, is giving us the wrong signal on where inflation is.

[Kelly Evans]

I mean that is a whole fascinating side conversation. Greg, what about the, the testimony this morning? One jump down to you,

[Greg Epp]

Almost nothing. That's why it was kind of a disappointment right now. First of all, the questions weren't great. I mean you're not going to get anything useful out of the Chairman of the Fed when you ask him should President Trump be trading crypto, what is he going to say to that? Come on. But that said, if the questions were better, I'm sure the answers would have been any more enlightening. As Claudia said, he's seems to want to give as little information on the outlook as possible. That's his prerogative. On the other hand, seem to want to talk a lot about AI well, last I checked he's the Chairman of the Federal Reserve, not of the AI Reserve. So I think with time I would love to hear a little bit more texture around his reaction function. All that said, Kelly, two things I did notice. He said we're not going to declare victory because of the good CPI number. Okay. So obviously he's not going to get carried away with that on balance sheet. He said a couple of things that I thought were interesting. First of all, he said he has not changed his mind. That is a mistake for the Fed to own too many long duration Treasuries. But he also said, and this is important, that you can't go back to the balance sheet of 2006 when the Fed operated with a regime of scarce reserves. That tells me that we're going to end up in a place that preserves the ample reserves regime we have on the liability side of the balance sheet, but an asset side that is much more tilted towards treasury bills.

[Thomas Hoenig]

Hmm.

[Kelly Evans]

All right, Claudia. That was just Wash leaving, by the way, after completing that testimony. So Claudia, where do we go from here then in terms of of economic policy? I guess we're still waiting a little bit to hear. You know, I know that we all want him to say these, this is my panel of of indicators or financial market data points. But sometimes I wonder if it's just if we're over complicating it a little bit. In other words, to Greg's point about the CPI, I mean it's down so much. It's the CPI is now up at the super core only 2% year over year. And maybe he's just saying let's all stop reacting to every data point. Just see how things come in by the next meeting and it'll probably be pretty obvious one way or the other. And in this case, Claudia, don't you think it now looks like there's no way they're going to hike? Not in the near term.

[Claudia Sahm]

So I still think it is useful for Fed officials to lay out their reaction function and just like their contingency plans. What are you looking for? The in the data that might get you to a hike, what might get you to a hold. Not with great specificity, but just give some general sense. We did get that in the minutes, so we have a sense of that from the committee as a whole. Chairman Marsh has not articulated that himself. It hasn't come out of his mouth. But you know, we have some guideposts and I do think even though we should not overreact to any one data point, whether you're in financial markets or you're on the Fed committee, like you do need to have a sense of how to read the data, where to go with it. I think we got some encouraging news on CPI today. I'm not as convinced this is like we're all clear or the PC is giving the wrong signal. But, but I think there is real value in tethering decisions back to some type of data as opposed to just we're going to deliver price stability.

[Fidelity Representative]

Right.

[Claudia Sahm]

Like we got to do more than just words here.

[Jennifer Johnson]

Right.

[Kelly Evans]

And we got to go, Greg. But maybe after IBM's report today, software prices won't be a problem any longer.

[Greg Epp]

That's right. Maybe not from IBM anyway.

[Kelly Evans]

You know, you do wonder how many outliers there are from how quickly And Wash himself talked about this, the pace of change in the economy and trying to keep up with that. So we'll see what the task force comes back with. We'll see how it goes with the Senate tomorrow. Thank you both for now. Really appreciate it. Claudia Sahm and Greg Epp, our next guest notes that for all of the new Fed chairs of the past 50 years, a rate hike has been their first move. So will this time be different? Let's bring in CFR chief investment strategist Sam so Stovall, it's good to see you, Sam. How are you gaming this out?

[Sam Stovall]

Hey, Kelly, good to see you again. I'm of the opinion that the Fed probably will not be raising rates sometime this year as was said that, you know, they are going to be looking at the data. We are likely to see inflation rates come on down and employment levels also imply that there's no need to be raising rates. But at the same time, they're probably done cutting rates at this point. So I would tend to say like the S and P performance thus far in July, we're probably going to tread water for a while.

[Kelly Evans]

Let's talk a little bit about what's going on across the broader markets today. We've heard we had that much better than expected CPI report. I might have thought stocks are up even more on that, frankly, kind of a muted response. We have the president backing off of this 20% toll that he was that toll fee he reimbursement rate for the Strait of Hormuz. Not quite sure how to interpret that. I mean that's one area I think of the situation with Iran that has certainly been surprising to the downside, but has not done much now that look at second quarter earnings, look how strong the banks were. This now I guess this is where our attention turns to. So what do you think are the most more important factors here?

[Sam Stovall]

Well, you're absolutely right. But we've started this quarter with an earnings expectations bar being exceptionally high. It's a 20% growth in the second quarter, 21 in the third quarter, 22 in the fourth quarter. So even at such a high level we're expecting to play leapfrog one over the other. And if you look at what are the drivers with the S and P growth expected to be up about 35% driven by a 61% rise in the technology sector and a 140% increase in semiconductor earnings. Like the old Milwaukee beer commercial tagline, it just doesn't get any better than this.

[Kelly Evans]

I, I can't help but acknowledge that might be a running theme. You know we were talking about this a week or two ago, this, we were calling it Goldilocks. You know, it seems that there are a lot of things that have come together in a really positive way for markets in the economy lately. I'm just, just an observation, probably a sign of the top. More seriously though, look at the semi ETF, the stocks up 3% today. How important to you is this leadership area? Do you need to see it continue to do well? Do you want to see it kind of transition to other areas of leadership?

[Sam Stovall]

I think I'd like to see a transition. We had an internal sector meeting yesterday and our group head Angelo Zeno remains positive on technology in general but is also saying that we could easily see some rotation within the overall sector. One reason is if you look at technology versus the S&P 500, tech is trading at a 20% discount to the relative P E over the last five years, 10% discount over the last 10 years and a 5% discount over the last 20 years. So you can't really say that technology is expensive certainly when compared with the market.

[Kelly Evans]

That being the case then other, you know, the broadening out the tech heavy part, but looking okay to you as everyone's making sure that this leadership area remains intact, the software crumbling today as there are concerns. Is that a macro level question? You know, in other words, if it turns out that some of the companies are the most reliable kind of income streams of the past 15 years, if that really is coming into question here, does that tell you something broader about the rally?

[Sam Stovall]

Well, I think what it says is because the rally has been so long and so dramatic that any kind of either actual or perceived trip trip up could end up triggering an awful lot of profit taking. I mean we realize about this software stocks that will be reporting this quarter. Microsoft is expected to post a 16% gain in earnings CrowdStrike a 26% rise and also service now in the single digit area. But certainly software is important and it's been accused of being on its last legs for a while. So I think rotation will take place within technology possibly away from the semi the software area.

[Kelly Evans]

And to your point, there's CrowdStrike up 10% today, even after some of the trouble we heard at IBM. We'll talk more on that next. Sam, for now, really appreciate it. Thanks for the time.

[Steve Liesman]

My pleasure.

[Kelly Evans]

Sam Stovall at cfra. Indeed. Coming up, we'll talk about the disaster. Did you do Jordan? She said IBM having its worst day on record dating back more than half a century. It's down almost 25%. Big Blue's warning of weaker software sales is rippling through the market. Is the SaaS apocalypse upon us after all? Plus, former Fed presidents Harker and Hoenig will give us their grades on Kevin Warshaw's performance today. The exchange is back after this.

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[Kelly Evans]

Welcome back. IBM is on pace for its worst day in nearly four decades, down 25%. The company out with a preliminary Q2 mission, citing weakness in its software business as customers shifted AI budgets towards hardware, including memory. CEO Arvind Krishna, summing it up this way in his letter to investors, he said, this quarter we faltered. We did not adapt and move quickly enough. Our next guest had viewed IBM software business as an area of strength. Brent Phil is senior software analyst at Jefferies. Brent this is shaving, by the way, almost 500 points off the Dow, but it's canceled out by Goldman, which is having a phenomenal session. So what happened here?

[Brent Thill]

It was a miss on the mainframe. You think about the big capital investments that are required in the mainframe this is tens of customers, not hundreds of customers that delay decisions. And if you think about what's going on, one is if you're a cio, you're facing all these price hikes across infrastructure. So make that investment or the investment back in the mainframe, you make the investment in the other area. Second, you have a paralysis. You effectively have a company's freezing trying to figure out where they're going with AI and they're in a test phase so that can stall purchases. So that's the second factor that we think is working against them. The third one is security. So with new AI systems, security becomes a bigger issue for CIOs than deploying and upgrading legacy infrastructure. So you have, in my opinion, three factors working against IBM. Tactically, it's really unclear speaking to them whether these deals rebound in the second half of the year. So right now I think investors just see that there's way better opportunities outside anything related to software. I'm living this, reading this every single day. Software as has been a source of funds for the past year and we don't see any let up given some of the signals that we're seeing. IBM. I think this is more IBM specific than it is a software industry issue. Yeah, but we have consistently heard, you know, commentary from others that this may not just be only IBM as, as, as the priority becomes AI. So dollars have to come somewhere and they're coming out of, they're coming out of software budgets.

[Kelly Evans]

And to restate what you just said, because this is a great catchphrase, it will probably take and run with it, but you call this AI paralysis. So corporate America, in other words, has a couple of things going on. They have to pay up in some areas. You know, they have to deploy. I figure out how to do that. Like you said, they have to then invest in security. And we mentioned CrowdStrike's up 10%. I mean there's areas of quote unquote software that are doing well in and in spite of this also this is a point that Josh Brown made last hour. But IBM was one of the companies that Starbucks said, I think it was last week or the week before when they talked about doing some of their own in house stuff, maybe replacing Salesforce. They also talked about IBM being one of the names that was impacted by that. Do you have any more detail on whether that was the same issue as the one we're talking about now?

[Brent Thill]

Yeah, I love Starbucks, but it's a rounding there for IBM. They don't do really any business with IBM, so the whole story is taken out of context. You know, they do a couple of million dollars of revenue. So I think this whole concept that you know, Starbucks is leaving IBM and it's over and that, that, that's the storyline that's, that's just not right when you're that tiny on a company as big as IBM. So IBM has actually said that Starbucks is buying a lot of the new, their new products. And look, every CIO is trying to inject more AI into their systems from anthropic of any eye others in the ecosystem. So I think every single company would say the same thing. I'm trying to reduce my reliance on just the legacy vendors. I'm trying to bring the new vendors in because I'm trying to stay innovative. I mean so like every company is doing that. That's what you it do. Kelly, if you were the CIO of Starbucks, right? So I think the story got a little too much attention around the fry BMS financials right now.

[Kelly Evans]

So my final question this is to quote the CEO himself, it'd be one thing if he said look, we're doing a great job. The environment just is what it is. But he said we didn't move quickly enough. What does moving more quickly for IBM or for any other software name? I don't know if Microsoft is in this category again they have the, the cloud business. But what does moving quickly right now look like?

[Brent Thill]

I'm a big fan of Arvin. He's a software focused executive. Like I really like what he's doing strategically. I think tactically they had these handful of deals just fall apart at the end of the quarter and they need to do more to understand where, how they get in the mix, how they fight this budget pushout from eyes, you know, the suddenly the kid that you're giving all the attention to and they're like, you know, what about me? And they need to be earlier in the conversation and figure out that, and try to figure out how to forecast that better. And you know again, these are huge, huge deals. I mean they miss software, you know, by over $300 million, right? These are, these are, these aren't tiny deals. So I think they have to do a better job managing the elephant deals and making sure they have a lot of antelope deals. So the smaller deals to ensure that if a couple of these big deals move out that they're, they're ready.

[Kelly Evans]

But yeah, well, I appreciate the granularity as so many people are going to see this headline and wonder what in the world happened I'm going to point them to this discussion. Brent, really appreciate it. Thanks for making the time. Jefferies Brent Bell Coming up, the big banks just crushed earnings. Very different story than IBM. JP Morgan just delivered the highest quarterly profit ever in the US Banking sector and it's not the only bank to set a record today. Those details are next.

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[Kelly Evans]

Stocks are mixed after the cooler than expected CPI print and with a tug of war between IBM and Goldman in the Dow today, it's also been a banner day for bank earnings earnings as we kick off the second quarter earnings season, many bank shares are now hitting new all time highs. Goldman having its best day in over a year after beating profit and revenue estimates. Its equities revenue soaring 72% to about 7 1/2 billion dollars versus the estimates of about 5. Investment banking fees were up 55% thanks in part to IPOs, secondaries and debt issuance. The deal's backlog is at the highest in five years and CEO David Solomon says the company is in a sweet spot.

[Thomas Hoenig]

I think the firm is in a position where this moment, this environment is just super aligned with what we do really well. We're in a technology super cycle that's accelerating. There's enormous demand for capital formation. We sit at the center of that with our franchises.

[Kelly Evans]

Bank of America meanwhile, seeing double digit gains across the business including in trading and investment banking. And as CEO Brian Moynihan also told us earlier, they're seeing strength in the consumer.

[USAA/Fidelity Advertiser]

Actually the month of June, gas prices, gas spending came down obviously because the oil prices have started coming down. But overall, consumers adjusted to that and spent. If you look at the lower income third of the households, you're actually seeing the wage growth. We can see deposits in their accounts is actually going up and catching up to the other household households, the medium and high earners. That's good. So overall, consumers in pretty good shape.

[Kelly Evans]

And meanwhile, over at JP Morgan, nearly or actually every major business line posted record revenue last quarter. Those shares are also moving higher. Here's what Jamie Dimon said on the earnings call about the macro picture.

[Thomas Hoenig]

I just think we were in a

[Kelly Evans]

very healthy, active, exuberant market with very high prices and very high volumes.

[Steve Liesman]

And we benefit from that. We just don't know how long it will continue.

[Kelly Evans]

Could it get a lot better than this?

[Steve Liesman]

It can get better, but you know how much better? I don't know.

[Kelly Evans]

He also said Jamie Dimon did that AI has helped the bank cut up to 40% of jobs in certain roles. If you want to hear more about that, tune in tomorrow morning. He'll be on squawk box around 8 to 10am Eastern. Let's get to Christina Parts and evil list now for the CNBC news update. Christina, thank you, Kelly.

[Christina Parts And Evolis]

Well, Supreme Court Justices Elena Kagan and Amy Coney Barrett made a rare appearance on Capitol Hill asking Congress for more security funding. The court is seeking roughly $228 million for its next budget, including roughly $15 million for added protection. Barrett described wearing a bulletproof vest after threats, while Kagan said the danger to judges has grown sharply in recent years. Researchers are conducting the first human trial of a new Ebola vaccine developed at the University of Oxford. A rare strain of the deadly disease is fueling a fast growing outbreak in Congo. Health officials over there report nearly 2,000 cases and more than 700 deaths. There's currently no approved vaccine or treatment specifically for this Ebola variant. New York is set to impose the nation's first statewide moratorium on large data centers being used to power the AI build up. Governor Kathy Hochul ordered or order would pause new permits for as long as a year while regulators just write rules on energy demand, water use and of course, environmental impact.

[Kelly Evans]

Kelly, back over to you. We were talking to Verdev yesterday. He was saying we don't there's not ongoing water use anymore. It's a closed loop system. So anyway, we'll see what happens after that year is up.

[Christina Parts And Evolis]

They always point to golf courses being worse, right?

[Kelly Evans]

Oh, really? Is that what they say? Golf course more in defense. Yeah. Than than a data center now. Christine, appreciate it. Christina Parts And Evolis, we've got a quick market flash. Want to get to you on the electric luxury carmaker Lucid. Wow. Take a look at this one. The shares of Lucid are down more than 45% and halted for volatility. The immediate cause of this sudden move not apparent. But earlier today a website called electric vehicles.com reported that the Saudi backed company could go private or declare Chapter 11 bankruptcy before its next board meeting on August 5th. Again, if and when this reopens, Lucid shares down about 46% nearly and halted. We'll continue to follow that and let you know. Coming up, Apple retreating from yesterday's record high after getting a rare downgrade to sell over at KeyBank today. The analysts are citing three key fewer device subsidies, slowing upgrade rates and recent and price hikes pressuring user growth and services revenue. But could Apple's new AI plans change all that? We will explain. The shares are fractionally lower today. But first, a pair of former Fed presidents are here to weigh in on Kevin Warsh's testimony, his first as Fed chair. He's talking the talk on inflation, but will he be able to walk the walk? That's next. Kevin Warsh vowing to bring inflation down in his first biannual monetary policy report to Congress as Fed chair. Here's what he told the House Financial Services Committee this morning.

[Greg Epp]

The Federal Reserve can and will deliver price stability. We have the tools that you mentioned, both interest rates and balance sheet policy that can help us achieve that aim and we have the tools to deliver that.

[Kelly Evans]

Here to react are a pair of former Fed officials, Patrick Harker, former president of the Philadelphia Fed, and Thomas Hoenig, the former president of the Kansas City Fed. Really great to see you both again and thanks for making the time. Patrick, just to begin with, you broad reaction to his insistence. I mean, it was almost, you know, let's be glad it wasn't a drinking game. He kept saying this is our only job. We're going to get this down. And yet a lot of us, myself included, keep speculating that rate cuts could be the next move here.

[Patrick Harker]

Now I think right now they're on hold for a while. I actually thought Kevin did quite well in the focus on inflation, which is the primary focus, although you can't forget the other part of the dual mandate. And so I think generally I agreed with much of what he said. I was a little concerned when he said that the labor market is broadly stable. That's true technically, but it's also very fragile. And we see that we've seen that most of the jobs are being created in the health care sector. So while the economy is broadly stable and growing, there is an underlying fragility that I worry about.

[Kelly Evans]

Well, this was the point, Thomas, that Michael Kantrowitz made this morning over at Piper Sandler. He said this was the first month where we've had a miss on both the labor market and the inflation side, which normally would be a dovish outcome. But what did you think of the of his entire appearance this morning with part two coming tomorrow?

[Thomas Hoenig]

Well, I thought it was pretty much like his press conference. He's insisting that they're going to take care of inflation, but he didn't exactly explain why he's waiting for his task forces. He's also been a long critic of the balance sheet. He reinforced that which I think is important, thinking it's only good for crises, don't be using them and more calm times. And I think he's fairly optimistic on the economy, although I do agree with Pat Patrick that the economy right now is a little more fragile than we are acknowledging. And even with the very significant earnings reports that you were talking about earlier, I think there's still some vulnerability in the economy, and Kevin knows that.

[Kelly Evans]

Thomas, what do you think? Our Steve Liesman pointed this out and we're all curious. What do you think it means when war says he wants to get back to first principles?

[Thomas Hoenig]

I think he wants to get back to all right, our main goal is price stability, and through price stability we we will maximize employment. I think that's his first principles, and I think he wants to get away from when he says first principles, that doesn't include using the balance sheet to conduct monetary policy. I think that's what it's all about. The other part of it is productivity would affect how they conduct monetary policy. But his first principles are price stability and getting away from the balance sheet, and that enables maximum employment. That's how I interpret it.

[Kelly Evans]

Is that your read on it, too, Patrick?

[Patrick Harker]

Yeah, it is. I think he's really focused on the first part of the mandate, as we heard, inflation, which I think is appropriate. And he has a plan and a plan. Part of that is not to communicate as much. And we'll see how that all works out. I mean, paraphrasing Mike Tyson, everybody has a plan until the next crisis happens. And you know we're going to have another crisis. We don't know when or where, but it will happen and he'll have to revise his plan accordingly.

[Kelly Evans]

What do you think? You know, Thomas kind of alluded to this but you know, waiting on the task forces. Patrick, what do you think is going to come out of this? Where he said I want them basically to sort of have a carte blanche start from if this was day one and we just had to put together, how do we figure out what's going top to bottom? What do you think they might present him with?

[Patrick Harker]

We'll see. There'll be a lot of ideas. There'll be a lot of ideas thrown around how much will actually change the day to day functioning of the fomc. I'm a little more skeptical of that to be honest.

[Kelly Evans]

What about the question he got from the congresswoman, Patrick, who was kind of insistent, I was curious for the answer but they ran out of time and she said, you know, tell me if you're going to commit to a press conference every time or, or what does it mean that you're just, you might just decide when it's necessary. And again, going back to the parting comments that we heard from Fed Chair Powell who said one of the reasons that they went to a press conference at every meeting is because the committee ended up feeling they should only make major changes or moves when there was a press conference. So they unintentionally had kind of boxed themselves in a little bit by I think it used to be they would do it at every other.

[Patrick Harker]

Yeah, I mean it clearly it's the chair's prerogative how he or she wants to run the committee and of course the post committee communications. I am worried a little bit that, you know, if there's a vacuum, people fill the vacuum and we're already seeing that with people clamoring for okay, you're not giving me forward guidance but tell me what your reaction function is. As if there's one reaction function for the committee as opposed to 19.

[Kelly Evans]

Right. Thomas, any comment on that?

[Thomas Hoenig]

Well, I think, I think real, one of the real issues is there's decisions that have to be now made before these task forces render their reports. And I think that's where we're going to learn a little bit. I think we'll learn something at this next meeting here coming up next week in terms of do they, do they move or don't they move? And I think the only move is up if they're going to move. But we'll learn something if they wait and if they use it all the explanation that we're waiting on the task forces, I think that will under undermine their credibility. So they've got to be prepared to make decisions between now and before these, these task forces report. And I think that's extremely important to get out there. And I don't know about the press conferences. I think if you have a rule that says every other one, that that may work. But I think, I think Patrick's right if you do it only when it's important. So as you announce that you're going to have a press conference, you'll have the markets going crazy. So he's got to, he's got to decide pretty quickly.

[Kelly Evans]

I'd love a surprise press conference where you never know. We, everybody just has to gather and either you've wasted your time or, or I wonder the same thing from a logistics point of view as to how that might all work. So we'll all stay tuned and maybe we'll find out more. Gentlemen, thanks for now. Appreciate it.

[Thomas Hoenig]

Thank you.

[Kelly Evans]

Thomas Hoenig and Patrick Harker. Coming up, memories Wild Ride continues. Take a look at DRAM. Up nearly 7% today. And now Apple is evaluating an AI model that could upend that. We'll talk about it next. And oil price prices back on the rise but now around $78 a barrel following reports of explosions in and around Iran. Though President Trump posting on Truth Social earlier that the Strait of Hormuz is open to quote all ship traffic except for Iran. Closing bell overtime. We'll have much more with Energy Secretary Chris Wright coming up at 4:30pm Eastern. We'll be right back. Apple is about a year late, depending on how you measure it, in debuting Siri AI. They're also currently evaluating an AI model that could give them a serious competitive edge and have a big impact on the memory space. Mackenzie Seagalo's got an exclusive look at what they're up to and joins us now with the details in today's tech check. Hi Mackenzie.

[M]

Hey Kel. So Apple opening the iOS 27 and Siri AI beta to the public last night, giving iPhone owners their first broad access to the long delayed Siri overhaul. But catching up with OpenAI and anthropic may depend on Apple delivering on its longer term strategy running more powerful models directly on the device. Now I'm told that Apple is evaluating tech from Prism ML. This is a Khosla backed startup based out here in Silicon Valley that's compressed Alibaba's open source Quinn model from roughly 54 gigabytes to less than four small enough to run directly on an iPhone 15 or newer. Now the company exclusively telling me that it slimmed down model is now available to the public it's larger than the lightweight LMS that typically run on a phone, with enough capacity for reasoning, coding and image based tasks. Prism ML says that its tech cuts memory needs by up to 15x while also making the model faster and more energy efficient. CEO Baba Kasibi telling me that Apple is reviewing the technology and measuring its speed, energy efficiency and performance on its devices prices. He described the discussions as very early, but said that things are progressing nicely in Kelly this is the kind of tech that analysts tell me could disrupt the semi's trade. Morgan Stanley estimating Apple's memory cost could rise 190% next year. But if powerful models can run with dramatically less memory and in some cases fewer GPUs, investors may start questioning how much DRAM and DataCenter compute the AI build out ultimately needs.

[Kelly Evans]

Yeah, it's fascinating to hear a story like that on a day when the DRAM ETF is up 7 or 8%. MacKenzie granted it's been under some pressure lately, but this feels like a hugely important development. And tell us again, what are what's the new launch with with Siri that Apple is this now available to everybody?

[M]

So this Prism ML is releasing the slimmed down version of Alibaba's Quinn model to the public. This is something that can run on an iPhone 15 or later and their tech is what Apple is taking a look at right now to see if it's something that they could ultimately work into their products to, you know, whether that's their own alarms that they've developed in conjunction with Gemini or being able to run other alarms. Again, this is still early days, but these are the kinds of breakthroughs that make memory like the kind of memory efficiency breakthroughs that make those memory names really jumpy. Micron lost a third of its value in March after Google published its Turboquant paper, basically saying that it could produce memory without hurting AI model performance.

[Kelly Evans]

That's right. I already forgot about that. It's amazing how quickly this all moves. Mackenzie, thanks very much. For now, Mackenzie Sagalos coming up, PNC's Young Yuma telling us yesterday that he expects tech capex to stabilize this earnings season. But because big tech has capped tapped the capital markets so heavily, rising oil prices and interest rates could challenge future returns. We'll talk about Alphabet's Muni Bond. Yes, Muni Bond issuance next and whether other tech giants could follow suit. Stay with us. Welcome back. Since November, Alphabet has raised nearly $137 billion from capital markets to fund its AI buildout. And recently it turned to an unexpected source, the muni market. The company participated in roughly $1 billion prepaid energy transaction with California's pioneer Community Energy, allowing the utility to lock in cheaper power rates and giving Alphabet a discounted energy supply and some infrastructure financing. Could more companies follow suit? Let's ask Jennifer Johnson. Franklin Templeton senior vice president and director of Muni Bond Research. Jennifer, it's good to see you. So how does this deal work?

[Jennifer Johnson]

So what prepaid energy bonds are meant to do is lower the fuel costs. Ultimately that means lower rates that you and I pay for electricity. Bonds have been around for decades. They've become much more popular recently as a result of the muni market being a more attractive market to finance these deals. There's been a lot of demand into the muni market, meaning that as to the extent there's greater supply, we can have demand that's there to purchase the bonds. They're complex deals and require a corporate entity to serve as sort of the financing entity and ultimately guarantee the debt. The muni market had been very comfortable with banks and insurance companies traditionally filling this role. But this deal you're referring to is the first time a tech entity, Alphabet in this case, came to the market to try to take advantage of this low cost borrowing opportunity to ultimately lower rates. And it was very successful for them.

[Claudia Sahm]

Yeah.

[Jennifer Johnson]

And we expect that this will continue.

[Kelly Evans]

What, what does the power company get out? I mean, wouldn't they want to say no, we want, we want you to pay higher rates?

[Jennifer Johnson]

Well, I think the idea is that it's not necessarily Google who's paying the rates. It's me and you. They're, you know, traditional residential customers that receive, you know, they're, they're, in this case the area around Rockland, California. Those customers that are paying that electric utility for electricity, those are the rates that are ultimately going to come down with lower fuel costs.

[Kelly Evans]

When we see Jennifer now, New York says a one year moratorium on adding new data centers. Do you think more deals like this could help to allay those concerns?

[Jennifer Johnson]

Sure, I think there's a lot of noise going on right now. The municipal market is going to continue to be a player in this and that, you know, utilities are going to be asked to provide more electricity and water to support these centers. And so I think a lot of states and local governments are taking a hard look at whether or not their communities can support this type of facility in their area. And so a lot of areas have said, no, we need to think about it, we're not going to do it or They've changed the incentives they would traditionally provide to a corporate entity who wants to come in and open a business. And in some cases they're saying, welcome, we'd love to have you. We have the ability to support your type of business here. And so I think it's going to vary across, across the country as to who's most receptive. But ultimately, you know, we expect to see continued supply of these types of prepaid bonds, whether it's an Alphabet serving as the entity or another.

[Kelly Evans]

And in the final minute, Jennifer, that we have you, I mean, what are your thoughts broadly on look at that cpi. Were you guys dancing, jumping up and down when you saw it's that was a big surprise to the downside.

[Jennifer Johnson]

Yeah. So I mean the market has been a little rocky this year. We've had ups and downs certainly for the first half of the year. Munis did well and we think demand is going to continue to drive the performance for the rest of the year. So to the extent that there are still people interested in getting into municipal bonds, we expect demand to continue to be strong and manage all the supplies coming in. So I think it's going to be a good last half of the year.

[Kelly Evans]

All right, Jennifer, appreciate it very much. Thanks for joining us today. Good to see you.

[Jennifer Johnson]

Thanks.

[Kelly Evans]

Jennifer Johnson. And that's it for us. Thank you for watching the excellent exchange. Coming up on Power Lunch, shares of the data center developer, speaking of data centers clean spark up as much as 15% today after signing a 20 year lease agreement with a tech heavy hitter. CEO Matt Schultz will join us and I will join Brian for that after this quick break. You've been listening to the exchange. Make sure you're subscribed to get each episode every day, same time, same place.

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