Fed Modifies Policies
In a recent development, Nvidia shares experienced a significant drop of more than 2.5% following China's ban on two of its tailor-made semiconductors. This move by China's internet regulator comes as a blow to Nvidia, one of the world's leading manufacturers of artificial intelligence chips.
Meanwhile, the Swiss National Bank (SNB) finds itself in a unique position, having become one of the world's biggest investors in US stocks. Approximately a quarter of the SNB's US stock investments are in five companies: Amazon, Apple, Meta, Microsoft, and Nvidia. However, this heavy exposure to US tech stocks creates concentration risk, especially considering the SNB holds nearly $170bn in US stocks.
The SNB's strategy to weaken the Swiss franc by investing in foreign currencies, such as US dollars, is aimed at boosting the country's economy. Yet, it also exposes the SNB to potential risks, such as sharp losses if an AI tech bubble were to burst.
The Federal Reserve, on the other hand, recently lowered interest rates by a quarter point on September 18th, marking the first rate cut this year. The Fed's focus is shifting from inflation to the labor market, with its policy had been skewed towards inflation for a long time, but is now moving towards a more neutral policy.
There is a significant disparity in views among Federal Open Market Committee (FOMC) members about the direction of the US economy. The average member of the FOMC now projects three quarter point rate cuts by the end of 2025.
The Fed's new focus on the labor market was highlighted by Chair Jay Powell, who stated that recent economic data showed a cooling labor market. This shift in focus comes as the Fed faces internal disagreements, with Stephen Miran, Trump's newly confirmed pick for the board, voting for a larger rate cut of a half point.
The SNB's investments in US equities reflect the strength and stability of Switzerland's economy and governance. However, the SNB's bond market is too small to absorb the scale of its interventions, raising concerns about the long-term sustainability of its strategy.
The US economic expert interviewed in the FT News Briefing podcast about the Fed rate cut was none other than Stephen Miran. The Swiss franc, the best-performing currency over the past 50, 25, 10, and 5 years, continues to maintain its strong position in the global economy.
In conclusion, the tech industry continues to face challenges, with Nvidia feeling the impact of China's ban on its semiconductors. The SNB, in its efforts to weaken the Swiss franc, finds itself exposed to potential risks, while the Federal Reserve navigates internal disagreements as it shifts its focus from inflation to the labor market.
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