Fed Holds Rates — Inflation Back in Focus
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Welcome to Profiteer Markets. I'm Ed Elson. It is January 29th. Let's check in on yesterday's market vitals. The S&P 500 hit 7,000 for the first time ever to start the day. Still, all three major indices ended the day flat after the Fed's interest rate decision. More on that in a minute. Meanwhile, the yield on 10-year treasuries increased. Oil climbed after President Trump warned Iran that a, quote, "'massive armada' is ready for violence." And Tesla stock rose after hours as the company posted a better-than-expected fourth quarter report. However, revenue for the full year dropped for the first time in company history. Okay, what else is happening? The Federal Reserve is holding rates steady after three consecutive cuts last year.
The central bank explained that unemployment is showing, quote, some signs of stabilization, while inflation remains, quote, somewhat elevated. In his remarks... Chair Powell said that the outlook for economic activity has, quote, clearly improved since the last meeting, and that should matter for labor demand and employment over time. Meanwhile, two governors, Stephen Myron and Christopher Waller, dissented. They voted in favor of a quarter point cut. Stocks wavered after the decision to hold, pulling back from a record high earlier in the session. Okay, here to discuss this Fed decision and what it might mean for markets was speaking with Michael Gapin, Managing Director and Chief U.S. Economist at Morgan Stanley.
Michael, thank you very much for joining us on Profity Markets.
Thanks for having me on.
So this Fed decision, the Fed held steady, pretty much as expected. There were There was some dissent from Stephen Myron, from Christopher Waller. Let's just start with your initial reactions. Did anything jump out to you from this Fed meeting?
Well, as you noted, the decision to stay on hold was widely expected. That was no surprise. And so I think what markets and I was looking for really was... Is the Fed, have they paused or are they on pause, right? In other words, was this a hawkish hold, meaning they want to signal that they will be on hold for a long time. They don't anticipate adjusting the policy rate for a long time. Or was it, hey, things look a little bit better, But we think as inflation comes down, we might ease later. Did they maintain an easing bias? So that was really the key, I think, for all of us in markets and what I was looking for. Was it a hawkish hold or a dovish hold? And I think we did get the latter. So the Fed certainly felt like the economy has gotten better.
There are some signs that the labor market has stabilized. There doesn't appear to be a lot of upside risk to inflation. So given that they had already moved 75 basis points or cut three times, I think they felt like it was time to stop, look around and see how the economy evolved.
What does that mean for rate hikes or rate cuts moving forward? And what does that mean for the battle between Donald Trump and Jerome Powell? Of course, the president has been pushing for rates to come down. How does this change things, if at all?
Well, I think the way that I would describe it is coming into the second half of last year, the Fed was cutting rates on concerns about the labor market. The Fed felt there were downside risks to employment, so they were labor market based cuts. But if they've upgraded the outlook, they say activity is solid. I think that's hard to deny that. And they said the labor market is showing signs of stabilization. So I think what that means is cuts shift to inflation-based cuts. In other words, when it's clear, if they're right, that tariffs only inject temporary upward pressure on inflation.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:00–4:47
2
What is the Fed's decision on interest rates and its implications?
4:47–8:14
3
How does Michael Gapen interpret the Fed's economic outlook?
8:14–11:09
4
What were the earnings results for Meta and Microsoft?
11:09–11:35
5
Why did Microsoft's stock react negatively despite a revenue increase?
11:35–12:23
6
What factors contributed to Meta's strong earnings report?
12:23–16:42
7
How is Adobe positioned in the current market landscape?
16:42–17:07
8
What challenges is Adobe facing in terms of competition and AI?
17:07–40:04
Speakers
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