Fed stands pat to no one’s surprise….
• Fed Chair Powell held his first press conference of 2025 today. To the surprise of no one, the central bank took no action on interest rates. However, what was more important about today’s announcement was the commentary. Powell’s disposition and language favored neither a dovish nor hawkish position. According to the Fed Chair, although hiring has slowed, the labor market remains in a good position as is also the economy. Inflation is yet to achieve the target of 2%, but it continues to make progress. Powell emphasized that the Fed would continue to be data dependent and not let outside parties, i.e., implying the White House, pressure the committee on future rate decisions.
• President Trump returned to the White House last week and once again smartphones are actively buzzing with new breaking news. One of the Administration’s most significant proposals is a sharp increase on many imported goods. If enacted, this move would almost certainly help reignite inflation – the very thing that the U.S.’s central bank has spent the last two years trying to tame. However, so far 2025 is off to a good start with December inflation figures beating expectations as the readings came lower than originally forecasted. However, inflation data is a lagging economic measure. As a result, any inflationary effects from actions of the new Trump Administration are unlikely to be seen before this summer, at the earliest.
• Looking to the financial markets, the recent release of China’s DeepSeek AI caused sharp declines in all AI and AI related stocks on Monday. To the dismay of semiconductor companies like Nvidia, Broadcom, and others, the Chinse AI firm claims that its product operates at a fraction of the cost of its rivals. If these claims prove true, there could be sharply lower demand for advanced chips and the many products and services associated with the nascent AI industry.
• Of concern for stock investors, the equity risk premium recently turned negative. Defined as the difference between the corporate earnings yield and the yield of the 10-year Treasury, the differential between the two figures indicates how much investors are compensated for the greater risk of owning stocks over risk-free government bonds. Given their risk profiles, over the long-term stocks should provide a higher return than risk-free bonds. In recent days, however, there has been no additional premium to hold stocks over bonds – a concerning assessment regarding the valuation of the current stock market. As a result, Wall Street is lacking critical support for meaningful sustained additional advances. However, as we have discussed previously, the “animal spirits” can drive markets upwards for quite a while although underlying fundamentals can be weak.