Chapter 1: What is the main topic discussed in this episode?
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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?
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Chapter 2: What is the Fed's decision on interest rates and its implications?
But I think Powell made it pretty clear. He said nobody is considering, at least it's not in anyone's baseline case, that there should be rate hikes. So I think in some ways the Fed is still kind of cutting off the upper end of the policy rate distribution and saying we're either on hold for a prolonged period or inflation will decelerate and we can move our policy rate lower.
As you pointed out, the administration would clearly prefer lower interest rates. So what they want may come later. But I think the Fed sees the economy as warranting lower rates, but it may take more time to get there.
If it's all about inflation now, or mostly about inflation, as you say, what is the Fed's view of what we're seeing with inflation right now? Because, you know, it's still pretty high. The target is 2. We're at 2.7, although there are questions over whether that 2.7 number is accurate, given the shutdown that we had in the government. So I guess the question being,
What does Jerome Powell think about inflation right now? Does it appear to be a real concern?
I would say with each passing month, they have greater confidence that inflation will be coming down later this year. So the way that he's talking about it is, yes, there is clear evidence that tariffs are pushing goods prices higher. Not meaningfully higher from the Fed's perspective, but certainly they're moving higher, and that's something to watch.
But there are other goods prices which are not as exposed to tariffs. Those aren't moving higher. And he said services inflation, which is mostly about domestically generated inflation, that that's decelerating. So they look at it and I think they say outside of tariffs, it looks like inflation is decelerating towards their target.
So once we get through with the pass-through, then goods prices can start to come down as well or at least stop rising. And so they have a pretty favorable outlook. So I think it's more like a matter of time for them. How quick, how long does the pass-through last? And then how quick does inflation decelerate after? But a year ago, it was almost a year ago, right?
After Liberation Day, very different story, right? They were very concerned about upside risk to inflation and inflation firming well above the target.
Yes.
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Chapter 3: How does Michael Gapen interpret the Fed's economic outlook?
or that that is a reason to not worry so much? I mean, it seems that the 2% number, the target, has perhaps been abandoned, or at least they don't really believe that that is the true target. What would you say to that?
So I think it's fair to still have concerns, and I think it's right to point to the fact that we don't have the entire picture on inflation. There's probably some catch-up still to be had in the January data, and certainly even into next April. That's a legacy of the shutdown and the inability of the BLS to sample prices when they need to. So there is probably some makeup effect there.
So I think we shouldn't be so quick to declare victory on inflation. I generally agree with the Fed's view, but what I would say is we should really have a watchful look.
i inflation has been above or well above the fed's two percent target now i'm going on five years how long can that happen and inflation expectations still remain stable consistent and and low right so when if that market slips if inflation slips and inflation expectations slip getting that realigned would be costly in terms of of economic output and perhaps on unemployment so i think the fed's right
And I think the way they would answer this question, and I will answer this question, is that's why they're keeping their policy rate at least modestly restrictive. Yes. So yes, they reduced policy rates, but they didn't get policy outright easy. they made it less restrictive.
So they've left it a little restrictive, and they think that balances the pressures they're getting on inflation now versus the softness they were seeing in the labor market. Of course, we'll see if that's true, but that's the way I think they would answer it. Hey, we're not even neutral. We're not even easy.
We're still restrictive on balance, and that should help guarantee that tariff pass-through is transitory.
Along these lines, more macro, another topic that's been making headlines this week is the devaluation of the dollar. The dollar fell to its lowest level in four years on Tuesday. Meanwhile, the massive run-up in gold. And a lot of people, I can't tell how much of it is real, but a lot of people are talking about...
the debasement trade, the devaluation of the dollar, the unsustainable deficits and debts, which Jerome Powell discussed. And in concert with the massive rise in gold, it does appear that perhaps there is this kind of wholesale mistrust in US currency at this point.
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Chapter 4: What were the earnings results for Meta and Microsoft?
I noticed a lot of people are talking about that and saying, well, maybe you should care about gold prices. I just wanted to get your views on what we've seen with gold this week and also Jerome Powell's response.
Well, I think the way the Fed would view it is that we're linking dollar policy and gold policy, or at least dollar movements and gold movements together. The Fed doesn't set its policy rate to target the currency, right?
Chapter 5: Why did Microsoft's stock react negatively despite a revenue increase?
So it will respond to fluctuations in the currency and what that might mean about growth and net trade or inflation. but it doesn't make dollar policy, right? Other central banks, it's different. Primarily in the emerging market world, you may actually set interest rates to help guide the currency because that generates a lot of inflation, right? The tradable sector is much more important.
So I think what Powell was saying is, look, dollar policy and de facto then, if gold is representing sustainability concerns, both of those are really treasury policy. And so we're not supposed to comment. And there's a long history of that in terms of the division between the two institutions. That said, let's put that aside to the premise of your question.
Chapter 6: What factors contributed to Meta's strong earnings report?
There's a lot of concern out there. Let's say there's a laundry list of concerns that all end up looking like greater country risk for the United States. Whether it's concerns about an unsustainable fiscal profile, concerns about U.S. policymaking broadly, whether it's trade disconnections or geopolitical disconnections. There's a lot of concern about where U.S. policy is going.
The rest of the world holds a tremendous amount of U.S. dollar-based assets. It's about $62 trillion that the rest of the world holds. and US dollar assets, whether that's direct holdings of US corporates or bonds or equities or money markets. And so there's really no asset class where the rest of the world can say, well, we don't want dollar assets anymore.
We're going to sell $62 trillion and move them over here. There is no other market to rebalance to. So what we think is happening is that means, well, I still have to hold dollar-based assets. The question is at what price and how do I hedge them?
so the dollar gets a lot of that expression as we would say in in markets the escape valve for pressure and concerns about u.s policy making whether it's the debt profile or geopolitical or otherwise all of that is getting reflected in the dollar. So there's a number of factors that are causing dollar volatility.
And yes, usually officials, whether it's the Treasury or the Fed, will get worried about rapid movements in currency markets. And we did kind of get that this week. And we had comments by Treasury Secretary Besant today, no, we're not intervening in favor of a weaker dollar. So sometimes policymakers do have to step up to at least stabilize the situation and reduce volatility.
But I would expect that these dollar concerns will be with us for some time. And to your point, concerns about debasement of fiat currencies, and therefore that may drive demand at certain points in time for things like crypto, Bitcoin, and gold.
What did you make of the president's response to these concerns? I mean, he made a lot of headlines. He said, I'm not too worried about it. He said, you know, he said this comment about the dollar goes up, it goes down. It's like a yo-yo. A lot of... conclusions I think people are trying to draw out of perhaps not that meaningful words. He's just, you know, talking to a reporter.
But I'd be interested to hear your response to that. I think the takeaway for a lot of people is this is a big deal. And it sounds like from what you're saying, it is a big deal. And yet the president is saying, don't worry about it. It goes up, it goes down.
Well, I think it's akin to what Treasury Secretary Besson said in the sense of, hey, we're we're going to at least come to you in the moment without expressing too much concern. We've got a handle on the situation. I would agree with you. I wouldn't read too much into those comments. And I would just read the totality of the administration's response to it, including what Secretary Besson said.
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Chapter 7: How is Adobe positioned in the current market landscape?
We thought it was going to be one of the Kevins. Now it appears it's going to be Rick Reader, or at least his chances have gone up if we look at the prediction markets. He's at 46% probability at the moment. Do you have any thoughts on... who the next Fed chair might be, and perhaps how much it matters.
So I have a stronger view on maybe who it's not than who it will be of the remaining three.
Chapter 8: What challenges is Adobe facing in terms of competition and AI?
That works. I do think that the timing of the DOJ subpoena served to the Fed has certainly helped, I think, reduce the likelihood that Kevin Hassett will be the chosen one. And Trump's remarks saying, I'd prefer to keep you where you are, I think foreshadows that a bit. So maybe it was the Senate's way of saying,
not this person given given the risks to the institution so that leaves rick reader kevin warsh and and governor chris waller i mean rick reader to your to your question he's been in financial markets for about 35 years so he has a deep extensive knowledge about how financial markets work that's important of course because fed policy is transmitted to the economy through financial markets.
Now, some will say, oh, but Rick Reader isn't a PhD economist. And my response to that will be, well, neither is Jerome Powell. And it's really not the job of the chair to necessarily be the best economist in the room. The job of the chair is to help build the consensus, to manage the committee, to herd the caps.
and communicate to financial markets and the broader public, Rick is certainly capable of doing that. So I think whether it's Rick Reeder or Kevin Warsh or Chris Waller, I think they're all capable to do the job. And I would just say recent events tell me more about who it's not going to be than who it will be. So no strong view for me. Betting markets, of course, have their view.
We'll see what the president chooses.
Michael Gapin, Managing Director and Chief US Economist at Morgan Stanley. Michael, this was extremely informative. Thank you so much.
Thank you.
After the break, Meta and Microsoft report earnings. And for even more insights, you can also subscribe to my weekly newsletter at edwardelson.substack.com.
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