The Federal Reserve Meeting of September has come and gone.
As expected, the Federal Open Market Committee has reduced rates of interest by 25 basis point, bringing down the Fed Funds Rate to an average range between 4.00 and 4.25%.
In its quarterly Summary of Economic Projections, the FOMC forecasted two additional rate cuts of 25 basis points before year’s end but just 50 by 2027.
It was exactly what the doctor prescribed. The US Federal Reserve has been easing monetary policies today and promising more in the future (so-far, so dovish). But this is not enough to indicate that rates would need to be lowered to combat an economic slowdown or a recession.
US Stock Indices Dipped Then Ripped
Dollar Index dropped briefly to the lowest level seen since February 20, 2022. It then rose. Gold and silver were initially sold before a sharp rise.
The Fed announcement was not a hit with everyone.
The President was too busy with his state visit to the UK for him to launch his full invective against the Fed.
The President made it abundantly clear that he believed the central bank and, in particular, its chair Jerome Powell, had acted in a political manner by failing to reduce rates aggressively in this year. The apparent hesitation of Mr Trump was only a temporary hiatus.
On the social media, Donald Trump shared a cartoon depicting him dismissing Jerome Powell.
The Trump administration has resumed its hostilities and will no doubt continue to harass central bank chairmen while trying to replace current Fed Governors with preferred candidates.
Jerome Powell’s retirement may take place in May but it won’t come soon enough for Donald Trump.
There’s also something simmering that could derail the current rally in US stock indexes. Investors have recently started to be concerned about how much money is being spent on developing Artificial Intelligence, or more specifically generative AI.
Nvidia is the chip designer that has led the charge. Nvidia is responsible for designing the semiconductors that are essential to the development and implementation of generative AI.
Nvidia’s role has been compared to selling picks and spades in the midst of a goldrush. It is the only company that controls these tools. Nvidia, which owns ChatGPT, announced a few weeks back that they were investing $100 billion into OpenAI.
This looks on the surface like another huge vote of confidence for AI’s potential growth. Some analysts, however, have raised concerns about the circularity and other aspects of this investment.
From another perspective, Nvidia appears to be lending money to its customers in order for them buy their own expensive chips. Let’s also not forget the money that has been poured into AI, with little or no return.
Investors are buying any AI-related company regardless of its tenuous connection. The valuations of the entire tech sector have risen to astronomical levels.
Some will not make it, just as in the ‘Dot.com bubble’.
It’s worth also considering how large a moat companies like NVIDIA enjoy around themselves.
China is determined to compete with NVIDIA and the US-China Trade War has fueled this determination. There’s good reason to believe that China will soon be able to achieve its goal, or at least something close to it.
Nvidia may soon look like an Emperor with his brand new outfit. Then that would be a huge bubble and Chinese technology could end up being the pin.
David Morrison, Senior Market Analyst for Trade Nation. His views are his. )
As updates occur, this post on The Emperor’s New Clothes may change.
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