Warning: The Fed Can't Rescue AI
14 days ago
- #Economic Policy
- #AI Bubble
- #Federal Reserve
- The US economy in 2025 is described as schizoid, with conflicting forces: Trump's unpredictable tariff policies depressing the economy and an AI investment boom boosting it.
- The AI boom is compared to the late 1990s tech bubble, with debates on whether it's a bubble or not.
- AI-related stocks are reacting strongly to perceptions about the Fed’s short-term interest rate policy, similar to the tech bubble era.
- Recent surges in AI-related stocks were catalyzed by remarks from Fed officials, suggesting a belief in a 'Fed put'—akin to the 'Greenspan put' during the tech bubble.
- The deflation of the 90s tech bubble was a prolonged process with temporary rallies, often driven by Fed interest rate cuts, but these did not prevent the eventual collapse.
- Interest rates affect asset values based on their economic lifespan; short-lived assets like digital technology are less impacted by rate changes.
- The Fed’s interest policy should have little impact on AI-related valuations due to the short half-life of digital technology investments.
- Market psychology, rather than objective assessments of future returns, drives short-term movements in AI-stock prices in response to Fed policy rumors.
- The Fed cannot rescue the AI industry if it collapses, as seen in the tech bubble's deflation, and may struggle to prevent a broader recession.
- Concerns are raised about the potential appointment of Hassett as Fed chair, citing risks to Fed credibility due to his alignment with Trump and alleged dishonesty.