Beyond the market mayhem from deepseek-led tech rout worth over one trillion dollars, the US Federal Reserve will watch closely if the wealth loss would lead to a change in broader consumer spending trend.
The US Central Bank is set to keep rates on hold later on Wednesday. However, the Fed is expected to take into account the real and perceived deepseek threat to markets.
Potentially, deepseek's technology could be a game-changer. Questions are being asked about the huge amounts of money the traditional tech players, the so-called magnificent 7, have been ploughing into AI development.
Deepseek shows that we can do more with existing computing power than previously thought. Moreover, deepseek is offering its model for free right now. Therefore, the market needs to price in a slower adoption rate of high-performance computing and the revenues of companies selling these AI models.
But here's a word of warning. Although the alarm bells are ringing for the 'Magnificent 7' today, things could turn quickly.
Deepseek tests limits of US Restrictions
There is still uncertainty about exactly how deepseek works, whether it is safe, and how robust it is. The Fed is worried about the stock market and how it feeds back into the real economy.
Primarily, this is via the wealth effect – will a stock market fall lead to consumers feeling less wealthy and therefore inclined to pull back on spending? This is incredibly important given consumer spending is 70 per cent of the economy. Other effects can come through the corporate sector.
Will it impact financing, or will it also make businesses more cautious about hiring and investment? The fed will remain watchful. If this leads to a broader correction, then the Fed will be much more inclined to cut rates.
The US Central Bank will come under intense pressure to cut rates from President Trump. If a sense of worry starts to hit free-spending households, they may well start to pull back on some of their consumption.
As a result, the Fed will be more inclined to respond with rate cuts. For now, the central bank is expected to pause on Wednesday and keep a close watch.
(With inputs from the agencies)