In-Depth Analysis of the Fed's September Interest Rate Meeting: What Will Happen to Your Wallet When “Raising Rates” Meets the “AI Bubble”?
Hello everyone, I'm your financial observer. Tonight, the global financial markets will be closely watching the Fed's September interest rate meeting.
If you don't usually pay much attention to macroeconomics, you might think that the Fed raising interest rates is far from your daily life. But believe me, it directly affects whether the stock funds in your portfolio go up or down, and even influences the cost of buying a house or a car in the future.
This meeting is being highly anticipated because it's quite unusual. For the past two years, the focus has been on when interest rates would start to fall, but this time, the market is worried about whether rates might suddenly rise. Meanwhile, the AI (artificial intelligence) sector is at a record high, and even the slightest disturbance can cause the entire market to react nervously.
Today, I'll break down this complex financial news into five key points in plain language to help you understand the logic behind it, what this meeting means, and what we, as ordinary investors, should do.
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1. Why Has the Fed Suddenly Changed Its Course? Four Major Pressures
In the past, the Fed's policy was simple: lower rates when the economy was weak, raise rates when the economy was overheating. But this time, things have become very complicated, with four forces pulling in different directions, making the Fed's decision-making extremely difficult.
1. Inflation: The “Undead Monster”
Although summer data showed that inflation (the rate of price increases) had slightly slowed down, don't be too happy just yet. The core indicator, the PCE (Personal Consumption Expenditure Price Index), is still around 3.7%, while the Fed's target is 2%.
The new chairman, Walsh (note: this might refer to a specific official or a hypothetical scenario; in reality, it's Powell), made a stern statement at the end of August: “A few better numbers don’t mean the trend has improved; I need more conclusive evidence.”
In plain language: It's like losing weight; if your scale shows you've lost two pounds, the doctor might still say you haven’t lost enough weight and suggest you keep exercising. The Fed believes prices haven’t really come down, so they can’t relax their vigilance.
2. Employment and Consumption Are a Bit Weak
July data showed that more people are looking for jobs (employment has weakened), and people are spending more cautiously (retail sales are soft). Logically, when the economy slows down, the central bank should lower rates to boost the market.
However, the Fed’s priority is inflation. They believe that even if the economy is slowing down, they can’t let prices soar out of control. It’s like a fire in the house (inflation); although it’s cold (the economy is slowing down), you need to put out the fire first, not turn on the heating.
3. The Middle East Situation Is Driving Up Oil Prices
This is the most direct “unexpected variable.” Tensions in the Middle East have pushed oil prices above $107 per barrel. Rising oil prices increase transportation and production costs, further fueling inflation.
In plain language: Oil prices are like the “cost of blood” for the economy; if the cost of blood goes up, the whole body suffers. This makes the Fed more inclined to raise rates to curb demand and thus lower oil prices and inflation.
4. Emotional Fluctuations in the AI Industry
This is a new variable that has rarely been linked to monetary policy before. Just a week before the meeting, several AI leaders made statements about the pace of development, which the market interpreted as “AI is spending too much money and might not be sustainable.” As a result, AI stocks tumbled, and NASDAQ futures plummeted.
In plain language: The market is very sensitive to AI now; any slight disturbance makes people fear that AI is a bubble. This panic makes the Fed consider whether not raising rates now could lead to further skyrocketing stock prices and exacerbate the bubble.
In summary: Inflation hasn’t dropped significantly, the economy is slowing down, oil prices are rising, and the AI industry is unstable. These four factors combined make the Fed’s decision-making extremely difficult and increase uncertainty.
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2. Three Possible Outcomes: Which One Is Most Likely?
The market doesn’t guess randomly; futures prices already reflect people’s expectations. Currently, there are three scenarios:
Scenario One: Raise rates by 25 basis points (highest probability)
- Meaning: The Fed decides to tighten monetary policy, making borrowing more expensive.
- Consequences: The dollar will strengthen, and short-term interest rates will rise. This is directly negative for the stock market because money becomes more expensive, and people prefer to save in banks or buy bonds rather than stocks.
- Note: If rates are raised, the Fed might hint that more increases are coming, which could cause even more panic in the market.
Scenario Two: Do Nothing, but the Statement Is Very Aggressive (hawkish pause)
- Meaning: Rates remain unchanged, but the statement is very harsh, suggesting that future rates will be high or that rate cuts are far off.
- Consequences: The effect is similar to raising rates, only postponed. The market will think, “Oh, they still want to raise rates; they just didn’t do it today.”
- In plain language: It’s like the boss saying, “I won’t deduct your salary today, but I warn you, if you make mistakes next month, I’ll double the deduction.”
Scenario Three: Do Nothing, and the Tone Is Moderate (lowest probability)
- Meaning: Rates remain unchanged, and the statement suggests that the economy is at risk and that rate cuts might be possible in the future.
- Consequences: This could be a surprise for the market, and stocks might rebound as people breathe a sigh of relief.
- In plain language: The boss says, “I won’t deduct your salary today, and I think you’ve been working hard lately; I might even give you a bonus next month.”
Key Point: The market has already priced in the negative impact of rate hikes. So, even if rates are actually raised, the market might rebound because the negative news has been anticipated. This is what’s known as “buying the expectation and selling the fact.”
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3. Why Are AI Stocks So Sensitive to Interest Rates? (Core Logic)
Many people wonder: Aren’t AI companies very wealthy? Why do their stock prices drop so sharply when interest rates change? There are two main reasons, which I’ll explain with simple metaphors.
1. The “Duration” Issue: Money in the Future Is Less Valuable Now
Most of the value of AI companies comes from their expected cash flows over the next 10 to 20 years, not from current profits.
- Metaphor: Imagine you have a lottery ticket that will pay $1 million in 10 years. If the bank interest rate is 0%, the ticket might be worth $900,000 now. If the rate rises to 5%, you might want to save the money in the bank and get more in 10 years, so the ticket might only be worth $700,000 now.
- Conclusion: The higher the interest rate, the lower the value of future cash flows in the present. AI companies, whose valuations rely on these future expectations, are therefore most sensitive to interest rates. This is the so-called “discount rate impact.”
2. The High-Leverage “Money-Burning” Model
AI isn’t just about writing code; it requires building data centers and purchasing thousands of GPUs, which cost billions or even trillions. Many of these expenses are covered by borrowing or long-term leasing.
- Double Pressure:
- Valuation: Higher interest rates reduce the present value of future cash flows, leading to falling stock prices.
- Costs: Higher interest rates increase borrowing costs, reducing profits and further driving down stock prices.
- In plain language: The AI industry is like real estate with high leverage. The value of the property (stock prices) is supported by expectations, but the cost of financing (interest rates) is also rising. This creates significant pressure.
Important Note: As long as AI companies continue to receive orders and build data centers, these price drops are just a “revaluation” due to higher costs, not a sign of fundamental weakness. However, if orders start to cancel, that would indicate a fundamental problem.
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4. What Should Investors Look For? Don’t Let Noise Disturb You
Facing tonight’s meeting and the subsequent market fluctuations, the most common mistake is to react impulsively—panicking and selling when rates rise or buying blindly when they fall.
1. Distinguish Between “Exogenous Shocks” and “Endogenous Deterioration”
- Exogenous Shocks (Interest Rates): These are caused by the Fed and are temporary. It’s like a rainy day; the road is slippery, so cars drive slower, but the cars themselves are not damaged. Once the rain stops (rates stabilize), the cars can continue to move.
- Endogenous Deterioration (Fundamentals): This is a problem with the AI companies themselves, such as a halt in technological progress or a loss of customers. It’s like a broken engine; the car can’t move regardless of the weather.
- Strategy: You need to determine whether the current decline is due to “rain” (interest rates) or “a broken engine” (fundamentals). For now, it seems more like the effect of “rain.”
2. Pay Attention to the “Second Derivative”: Changes in Growth Rates
Don’t just look at how much money AI companies are spending (in absolute terms); focus on whether the speed of spending is accelerating or slowing down.
- If new orders and the delivery of computing power are still increasing, it means the industry’s logic is sound, and the decline could be an opportunity.
- If growth rates slow down significantly or orders start to cancel, that could be a sign of a bubble bursting.
3. Short-Term Fluctuations Are Inevitable
Regardless of the outcome, the market will fluctuate in the short term. Rates will cause declines, and even a hawkish pause might lead to declines; only a surprisingly mild outcome could lead to gains. So, don’t try to predict the exact outcome of tonight’s meeting; instead, be prepared for market fluctuations.
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5. Conclusion: Long-Term Logic vs. Short-Term Noise
Finally, I want to provide some reassurance and some sobering advice.
Reassurance: The long-term value of AI hasn’t changed. Interest rates are just an “exogenous variable” that affects prices, not value. The impact of AI on productivity is real.
- Data Proof: Anthropic’s annual revenue has increased from $0 three years ago to $65 billion; OpenAI has also reached $45 billion.
- In plain language: These companies are not just talking the talk; they are generating real profits. As long as technology continues to advance and their business value is realized, the long-term trend remains valid.
Sobering Advice: Although the long term is promising, short-term risks cannot be ignored.
- Overvalued Market: The AI sector’s current market concentration means a lot of money is invested in a few giants. Any disturbance could lead to significant losses.
- Shareholder Pressure: Cloud computing giants (like Microsoft, Google, Amazon) are investing heavily in AI. If there’s no immediate return, shareholders may become dissatisfied, forcing companies to adjust their strategies, which could affect stock prices.
Advice for Ordinary Investors:
1. Don’t Panic and Sell: If the decline is due to rising interest rates but the AI companies’ fundamentals (orders, revenue) are strong, it might be a golden opportunity.
2. Think Oppositely: When everyone is selling out of fear, it might be a time to buy. As Buffett said, “Be greedy when others are fearful.”
3. Be Patient: Interest rate fluctuations occur on a quarterly basis, while the AI revolution unfolds over decades. Don’t let short-term noise overshadow the long-term trend.
In summary, tonight’s Fed meeting might cause AI stocks to experience a temporary drop, but it won’t undermine the long-term potential of the AI industry. For investors, it’s more important to distinguish between temporary setbacks and fundamental issues than to guess the exact interest rate numbers.
I hope this analysis helps you understand the situation and approach tonight’s market fluctuations with a clear head. Investing is a marathon; don’t let short-term disruptions disrupt your strategy.