3/23/24, 8:47 AM In the Markets, a Tug of War Between Big Tech and the Fed - The New York

ch and the Fed - The New York Times

STRATEGIES

In the Markets, a Tug of War Between Big Tech and the Fed
On Wall Street, excitement about A.I. outweighs concern about interest rates. But
rocketing stocks could make it tough for the Federal Reserve to cut rates.
By Jeff Sommer
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.

March 22, 2024, 9:00 a.m. ET

It isn’t much of a stretch to claim that the fate of the U.S. economy and stock market this
year — and, maybe, even the November elections — will be determined by the forces
arrayed at two consequential meetings held 3,000 miles apart.

One was a sales conference on artificial intelligence that filled a San Jose, Calif., hockey
arena to the brim, the other a conclave on interest rates, inflation and unemployment at
the Federal Reserve’s white marble neoclassical headquarters in Washington.

The moods conveyed by the events this past week couldn’t have been more different:
rampant optimism in Silicon Valley versus measured restraint at the central bank, which
held short-term interest rates high to avoid setting off another wave of fierce inflation.

On Wall Street, which is closely monitoring both the tech economy and the Fed,
excitement over the possibilities of A.I. riches outweighs concerns about interest rates
and inflation. The stock market has already soared since the autumn of 2022 and shows
every sign of powering higher.

But whether the current bull market has any chance of being sustained will depend in
large part on the Fed’s ability to dampen inflation without harming the core of the
economy. And excessive exuberance in financial markets could further delay Fed rate
cuts, which were expected to begin by now, but are now deemed unlikely to start until at
least June. The Fed doesn’t explicitly target asset prices, but it could be forced to hold
rates high if it appears that a dangerous bubble is forming.

Yet continued Fed inaction would protract the pain of consumers who have been
financing purchases at punishingly high interest rates. Those rates are making the cost of
housing and credit and auto loan debt painfully expensive. Quite likely, the debt burden is
contributing to dissatisfaction among voters, who give the Biden administration poor
marks for the economy. What’s more, if consumers run out of steam, the Fed’s campaign
to steer the economy safely toward a low-inflation future could run into serious trouble.

Consider what happened at the meetings.

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3/23/24, 8:47 AM In the Markets, a Tug of War Between Big Tech and the Fed - The New York Times

A.I. Woodstock
In a vast space usually reserved for San Jose Sharks hockey games and rock concerts,
Jensen Huang, the chief executive of Nvidia, told a standing-room-only crowd of tech
developers, investors and corporate executives on Monday that the future of A.I. had
arrived, right there, in front of them.

Pacing the darkened stage in a black leather jacket, jeans and sneakers, Mr. Huang held
two prototype circuit boards containing Nvidia’s latest superfast chips. These are
“amazing” products, he said. “This right here is, I don’t know, $10 billion,” he said. “The
second one’s $5” billion.

Customers will pay less for models off the production line, he said, without saying how
much. But no matter. The enormous investments in A.I. hardware will save companies
money, Mr. Jensen said, because the new technology is so much faster and more efficient
than that of the last generation. And this annual event, which Bank of America has called
“A.I. Woodstock,” was filled with deep-pocketed true believers. Hundreds of companies
are already on board, Mr. Jensen said, and Nvidia’s chips, components and software will
be the vibrant core of A.I. for years to come.

A.I. has already taken root in fields as varied as weather forecasting, factory logistics,
robotics, health care and asset management. And it’s generating staggering sums of
money for the companies building it, swelling Nvidia’s stock market valuation to $2.2
trillion and accounting for much of the exuberance — irrational or not — that has
repeatedly driven the market to new heights this year.

If this Silicon Valley A.I. gathering was intended to pump up passions for spending,
dreaming and investing, whatever the risks or costs, the second meeting, in Washington,
was devoted to curbing unwarranted financial enthusiasm.

D.C. Downer
Short-term interest rates in the United States are high. And they will stay high, at least a
while longer, regardless of the burden this is placing on millions of people.

That’s essentially the message that came out of the two-day meeting of policymakers in
the Federal Open Market Committee on Wednesday. In their own projections for the
months ahead, Fed committee members estimated that the benchmark federal funds rate,
now at 5.25 to 5.5 percent, will fall later in the year, perhaps by a total of 0.75 percentage
points by year end.

But in a news conference after the meeting, Jerome H. Powell, the Fed chair, made it
clear that rate cutting depends entirely on how the economy behaves. Recall that rates in
the United States were near zero only two years ago, when the Fed started its anti-
inflation fight. In June 2022, as the United States was recovering from the Covid-19
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3/23/24, 8:47 AM In the Markets, a Tug of War Between Big Tech and the Fed - The New York Times

pandemic, the Consumer Price Index reached 9.1 percent, a peak not seen in 40 years.
The Fed raised rates sharply and has pinned them for months at a deliberately
constrictive level with the intention of taming what the economist John Maynard Keynes
called “animal spirits.”

The good news is that the unemployment rate has been below 4 percent for the longest
stretch since the Vietnam War, labor productivity has been rising, and a long dreaded
recession hasn’t arrived.

But the Fed’s battle is still incomplete.

“Inflation is still too high,” Mr. Powell said. “Ongoing progress in bringing it down is not
assured, and the path forward is uncertain.”

Even if it makes the Fed uncomfortable, the stock market is aching to party. Traders
seemed to be completely unfazed by Mr. Powell’s latest warnings: The S&P 500 closed at
a record on Thursday, the day after he spoke.

Fixed-income markets are more cautious, with uncomfortable implications for consumers
and political strategists.

The bond market is eyeing the economy warily, bidding longer-term interest rates higher
and effectively reversing many of the gains of late 2023. One reason for this is that the
bond market is feeling the brunt of the Fed’s quantitative tightening campaign — in which
the central bank is shrinking its mammoth balance sheet by allowing up to $95 billion of
bonds to be redeemed each month without reinvestment.

That effort has reduced Fed assets to $7.82 trillion on March 11 from nearly $9 trillion last
year. The Fed is likely to slow the pace of tightening, hoping to avoid disruptions in
financial markets, Mr. Powell said. But by stopping bond purchases while the Treasury
issues larger quantities of securities to finance the nation’s debt, the Fed has, at the
margins, contributed to a supply and demand imbalance. That has probably increased
longer-term interest rates.

As long as the Fed holds short-term rates high, people with money to lend, including
savers who have parked their cash in money market funds, can find great deals. Big
money funds tracked by Crane Data are paying an average yield of 5.14 percent.

But there’s a dark side. High interest rates are a major burden on many American
families. Revolving credit card rates have soared above 20 percent, generating hefty bills
on interest alone. Consumers’ monthly payments on credit cards, auto loans and other
forms of nonmortgage debt are soaring. Those payments reached $573 billion in
February, according to the Bureau of Economic Analysis, and, in a big shift, they are
approaching the $578 billion in mortgage payments. Rates for new mortgages are so
steep that many people simply can’t afford a house at all. The cost of debt is just too high.

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3/23/24, 8:47 AM In the Markets, a Tug of War Between Big Tech and the Fed - The New York Times

Chafing debt burdens explain Americans’ skepticism about the economy, despite low
unemployment and falling inflation. That’s the conclusion of “The Cost of Money Is Part
of the Cost of Living,” a new National Bureau of Economic Research paper by four
economists at the International Monetary Fund and Harvard, including Lawrence H.
Summers, the former Treasury secretary. Basically, it says that it’s hard to feel great
about the economy when you’re mired in high-interest debt.

On Wall Street, A.I. aficionados and aggressive stock market investors are already feeling
optimistic. The steep rise of the market, led by tech stocks like Nvidia, AMD, Meta and
Microsoft, makes that self-evident. For ordinary people to share in the joy, however,
interest rates will need to come down. But rocketing stock prices will make it difficult for
the Fed to take action.

Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy. More about Jeff Sommer

A version of this article appears in print on , Section BU, Page 3 of the New York edition with the headline: A Tug of War Between Big Tech and
the Fed

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