Fed Rate Hike Looms as AI Bubble Fears Reach Fever Pitch

Wall Street analysts are describing the current market moment as "crazy days" and "silly season," even as one of its most bearish forecasters warns of a "late-stage" AI bubble. London-based forecaster Capital Economics has been building a case that the AI trade is a "late-stage bubble," citing eight categories of market indicators that are at or near levels historically preceding major peaks.

One of these indicators includes Microsoft's $450 billion market value increase in a single day, equivalent to 1.04 Houstons in assessed property value. The market's behavior has been described as "wildly swinging" even when the overall market appears calm, with Apple's loss matching 3.6 Hurricane Sandys.

The Federal Reserve is expected to raise interest rates for the first time since July 2023 this Wednesday, which could effectively end the current boom. Fed Chair Kevin Warsh has been dropping hawkish observations, including that inflation should be the central bank's overriding concern. Markets are pricing a quarter-point hike to a range of 3.75% to 4%, as close to a done deal.

UBS economists expect the Fed's own committee to revise its inflation projections down and its rate-hike projections up in this week's Summary of Economic Projections, which has never happened before in the history of the Fed's forecasting exercise.