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Hello and welcome to this week’s edition of Capital Management Weekly! Whether you’re just starting your financial journey or just looking for a way to improve what you have started, we’re here to provide tips, news, and advice to help you take control of your financial future.

In This Issue

• The Fed’s Upcoming Decision on Interest Rates

• The Tech Tightrope Surrounding China

• Useful Links

• Final Notes

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The Fed’s Upcoming Decision on Interest Rates

The Federal Reserve's upcoming interest rate decision on Wednesday significantly impacts the Consumer Price Index, the key measure of inflation. By adjusting the federal funds rate that banks borrow from the Fed at, the Fed influences borrowing costs economy-wide.

Raising this rate typically increases interest rates for consumers and businesses. This can dampen economic activity by making borrowing more expensive. Consequently, higher rates tend to cool overall demand for goods and services. As demand softens, businesses may struggle to keep demand for their products.

In some cases, businesses might even need to lower prices to attract customers. This reduction in pricing power can slow CPI growth. For example, a cooling housing market, influenced by higher mortgage rates, can moderate housing price and rental cost increases, key CPI components.

Similarly, businesses facing higher borrowing costs might reduce investment. This can lead to less upward pressure on consumer prices.

The Fed's actions also affect consumer confidence. Decisive moves against inflation can anchor long-term expectations. However, higher borrowing costs might initially lead to more cautious consumer spending.

Therefore, Wednesday's Fed decision will be crucial for the CPI's future path. It will indicate the likely trajectory of inflationary pressures.

Unfortunately, the more likely option this week is that the federal funds rate stays the same as it has been and that we do not see a large increase in the market

The Tech Tightrope: Why China's Ascent Remains Tethered to US Innovation

In this week's briefing, we delve into the often-mischaracterized technological competition between the United States and China. As recent analysis highlights, the reality is less a neck-and-neck race and more a story of China's significant reliance on the foundational technological superiority of the US and its allies.

The assertion that a genuine technological competition exists across most sectors between the two nations is a misnomer. Instead, the landscape is defined by China's considerable dependence on the US, a nation boasting a far more advanced technological base and a network of similarly advanced partners. This isn't merely a matter of current standing; it's a strategic advantage the US must actively cultivate and expand.

China's economic progress, particularly in high-tech sectors, remains contingent on its access to critical components like advanced chips and sophisticated capital equipment, largely sourced from the US and its allies. Recognizing this vulnerability, Beijing has embarked on an ambitious, yet challenging, journey towards technological self-sufficiency. This drive isn't solely motivated by economic security; the ability to indigenously produce key technologies would grant China greater freedom to pursue its geopolitical ambitions, unconstrained by reliance on external suppliers.

For the United States, the equation is different. The priority isn't reducing reliance on foreign technology, but rather maintaining and extending its existing technological edge. Given the widespread dependence of many nations on US innovation, the strategic imperative is to continuously push the boundaries of its own technology, ensuring a persistent lead.

China's technological lag is largely attributable to its late entry into the high-tech arena. Significant state-led promotion of the industry only began in the 1980s. While China successfully integrated itself into the global production network, becoming the world's assembler of smartphones, laptops, and computers, this role as a low value-added provider has inadvertently trapped it in a cycle of technological dependence.

This reliance is starkly illustrated by China's ballooning trade deficit in electrical machinery, including crucial semiconductor chips, which surged from $15 billion in 2001 to a staggering $217 billion in 2021. Notably, the US remains a significant source of these critical imports for China, ranking as its fourth-largest supplier in 2021. This dependence was further underscored by China's frantic stockpiling of US equipment last year ahead of new export restrictions.

The US's dominance in the upstream segments of the technology production network provides it with considerable leverage. The ability to restrict the flow of high-technology goods to China from its midstream partners, as seen in the ban on TSMC and Samsung supplying Huawei with advanced chips due to their reliance on US technology, demonstrates this power.

Furthermore, China's substantial expenditure on intellectual property underscores its technological reliance. The US has consistently been China's largest source of IP, with US IP exports to China tripling in the last decade, making it the top buyer in the Asia-Pacific region. Even increased US licensing requirements have not deterred China's appetite for American technology.

China's aggressive pursuit of foreign technology through legitimate and illicit pathways reveals its dissatisfaction with its current pace of technological advancement. Beijing understands that a slower technological trajectory translates to slower economic growth, potentially undermining the Communist Party's legitimacy. It also hinders the development of a military capable of directly challenging the US as well as the advancement of its internal surveillance apparatus.

For a technological latecomer like China, direct technology transfer is the most efficient path to advancement. However, declining foreign investment in manufacturing and fewer joint ventures are limiting this avenue. Consequently, the Chinese government is increasingly intervening to facilitate technology acquisition from the US.

Useful Links

This link is from the bureau of labor statistics website and can give you unique insights about the whole US CPI or a single part like food, energy, shelter, etc.

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