Wait-and-See Mode
The 'demand' for lower interest rates… What the Fed didn't do today… Wait-and-see mode on Trump policies… Up north… Some non-central bank news… About last night…
About that 'demand' for lower interest rates…
One of the biggest questions leading into the Federal Reserve's two-day policy meeting this week was how the central bank would respond to President Donald Trump's "demands."
As we wrote on Thursday, among other things, Trump said he wanted to see lower interest rates during his World Economic Forum speech in Davos, Switzerland last week. Many mainstream news outlets took it as a "demand" for lower rates.
I (Corey McLaughlin) think Trump was taken out of context a little bit...
He said if oil prices come down (he also asked OPEC to lower prices), and the war in Ukraine ends, then he would "demand that interest rates drop immediately." So there was some context, but, yes, it's a bit of a "demand" on Fed Chair Jerome Powell, the string-puller of bank-lending rates...
Powell was asked about this today at the start of his press conference following the Fed's meeting. He replied with a "no comment" and said he had no direct contact with Trump on the subject. As Powell said...
I am not going to have any response or comment whatsoever on what the president said. It is not appropriate for me to do so. The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals, and, really, keeping our heads down and doing our work.
Later, in response to another question about the Fed's independence – a constant source of strain during Trump's first term in the White House, when he constantly called for lower interest rates – Powell said...
As I've said countless times over the years, this is who we are, this is what we do. We study the data, we analyze how it will affect the outlook and the balance of risks... Don't look for us to do anything else.
So, about that...
What the Fed did (not) do…
The Fed held its target benchmark bank-lending range steady between 4.25% and 4.5% – which was widely expected.
The decision ended a stretch of three consecutive rate cuts beginning last September. And it comes after a bump in various inflation measures for most of the fourth quarter of 2024, while the U.S. unemployment rate has stabilized just above 4% for six months.
The Fed has a congressionally dictated dual mandate of "price stability" and "maximum employment." So it elected to pause its rate-cutting cycle for now. Powell said those goals are "roughly in balance," and continued...
With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.
The question now is whether the Fed is finished with the rate-cut cycle...
As we've written repeatedly, the Fed doesn't know what it's going to do next because it can't predict anything all that correctly. Central bank policy setters react to backward-looking data.
But, so far, inflation indicators have looked more "normal" over the past month or so, closer to a pace in line with the Fed's 2% annualized goal. For instance, the core consumer price index for December grew by "only" 0.2% for the month, which was cheered by Wall Street.
Right now, Wall Street expects the pace of inflation to come down in 2025, so federal-funds futures traders are betting on at least two more 25-basis-point rate cuts by the end of the year. Powell didn't say anything today that suggested they're wrong. He said...
The expectation is we'll make continued progress [on inflation]... It's just a question of when.
He also said that proposed Trump policies aren't in the Fed's interest-rate calculus yet, and that the Fed is in wait-and-see mode...
We don't know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy... I think we need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.
Powell said he hasn't seen substantial impacts to the U.S. economy from the "treat of tariffs" yet, but "it will be one of many things we'll be watching."
All things considered, it wasn't the most eventful Fed press conference we've ever heard, nor did we hear anything shocking. Appropriately, the major U.S. indexes were relatively little changed, closing just slightly lower across the board. The benchmark S&P 500 Index was down 0.4%.
Meanwhile, up north...
The Bank of Canada cut rates today and warned about the economic consequences of a tariff war.
The Canadian central bank trimmed its key policy rate by 25 basis points to 3%... cut growth forecasts... and its governor, Tiff Macklem, opened his post-policy-meeting press conference by saying...
A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada.
President Donald Trump has threatened a 25% tariff on Canadian imports to the U.S. That's three-quarters of all the stuff Canada exports, most prominently oil and gas.
As I have written repeatedly, I believe Trump's tariff threats are part of his negotiating tactics. They might not happen. But they could. So it's useful to play out hypotheticals.
For example, Macklem said if Trump does place a 25% tariff on imports from Canada and Canada responds with a 25% tariff of its own on imports from the U.S., he estimated it could cut Canadian economic growth by 2.5 percentage points in the ensuing year and 1.5 percentage points the following year.
Don't fret, there's non-central-bank news, too...
We didn't see any major signs of additional "DeepSeek fear" in stocks today.
Nvidia (NVDA) shares traded roughly 4% lower, but they were still higher than their lows on Monday. Many other stocks, like electricity producers, caught up in the "everything AI sell-off" earlier this week also traded higher for a second straight day.
The more we see action like this, the more we're inclined to think that Monday was just good old-fashioned panic selling for the AI era. But that doesn't change the potential risks we shared over the past two days about the AI boom becoming a bubble.
Elsewhere, three of the "Magnificent Seven" – Microsoft (MSFT), Meta Platforms (META), and Tesla (TSLA) – started reporting quarterly earnings after today's close. We'll have a report in tomorrow's edition.
The one thing all our readers will benefit from...
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Put simply, he figured out that there was a way to set up your portfolio that would increase your returns AND decrease your risk at the same time. He called it Modern Portfolio Theory. And it completely changed the entire financial world.
As Doc continued to explain, "portfolio construction" doesn't get the same attention as picking the next big individual stock. But the amount of money you allocate to a particular stock compared with others is far more important to your long-term returns than most people think.
In short, a properly allocated, balanced portfolio can generate similar returns as individual stocks, while also limiting losses during market downturns. It helps folks grow – and protect – their wealth.
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That means folks don't have to sift through the more than 170 recommendations Stansberry Research made last year and find the ones they want to buy. They can find our best ideas all in one place. And they get a diversified portfolio. Doc continued...
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Changes are coming next week...
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Doc says this investment strategy is the "one thing I think ALL of our readers will benefit from, starting immediately." If you missed Doc's presentation and would like to learn more about the complete portfolio approach, you can watch a replay of the event right here.
New 52-week highs (as of 1/28/25): Agnico Eagle Mines (AEM), Amazon (AMZN), Alpha Architect 1-3 Month Box Fund (BOXX), Compass (COMP), Cencora (COR), CyberArk Software (CYBR), Viant Technology (DSP), Fortinet (FTNT), HealthEquity (HQY), JPMorgan Chase (JPM), Kinross Gold (KGC), Meta Platforms (META), Spotify Technology (SPOT), Twilio (TWLO), VeriSign (VRSN), and Westlake Chemical Partners (WLKP).
In today's mailbag, feedback on some Fed analysis from yesterday's edition... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"The Fed's mandate of 'maximum employment' is diametrically opposed to technology's inexorable move towards minimal paid employment. When, if ever, will they recognize that?" – Subscriber Nick A.
Corey McLaughlin comment: Sounds like a good, rhetorical question to me.
All the best,
Corey McLaughlin with Nick Koziol
Baltimore, Maryland
January 29, 2025