Power Lunch - Fed holds rates steady, takes less confident view on inflation 1/29/25

Episode Date: January 29, 2025

The Federal Reserve kept its key interest rate unchanged today reversing a recent trend of easing policy as it examines what is likely to be a bumpy political and economic landscape ahead. We’ll break down what it all means for both markets and your money, right up until Fed Chair Jerome Powell’s press conference. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

And right now, let's get to Steve Leashman and the Fed's decision and call on rates. Steve. The Federal Reserve maintaining the funds rate in the range of 4.5% to 4.5%. They did say that inflation remains elevated as it had last time. But they crossed out a line this time, saying that inflation has made progress towards the 2% objective. I'm 100% sure what that means. Perhaps we'll ask Powell about that. Is that hogish or just getting rid of a tired old phrase? They say labor market conditions remain solid. They had said that they had ease, so they did an upgrade of the condition of the labor market,

also noting that the unemployment rate has stabilized at a low level. The economy, as they said last time, is expanding at a solid pace. The committee is watching risk on both sides of its dual mandate. The statement says the committee is still considering the extent of timing of additional adjustments, no hint as to when that might happen or by how much, and no change to the balance sheet reduction plan. They'll keep reducing the balance sheet as they have been. As the statement has said in the past,

it says they're prepared to adjust policy as appropriate if risks emerge. And we have a unanimous decision with new voters for the new year, January 2025 is when they turn over. We have Schmidt from Kansas City, Collins from Boston, Musil from Kansas City, and Gouldman from Chicago. So a bit of a Midwest contingent voting this time, Sons, Minneapolis. So back to you guys, very much. a stage statement, not much going on. And I don't know, Brian, can I use the phrase I reserve the balance of my time and send it over to you?

Well, wait a minute, Steve. You can't just drop it like it's hot because I'm just going to tell you, Steve, what you just said. I'm going to quote Steve Leasman and Steve Leesman. Labor markets are solid. Inflation may get better. Considering additional timing of moves. This sounds like a Steve Leesman quoting a Fed ahead of a rate hike, not a rate cut. You know, I guess so. I mean, I don't think that they're there at that point yet, Brian. I think the idea that the labor market remains solid is a positive that Powell and the Fed have that allowed them to figure out which way they want to go with rates. But I still think there's an inference in the statement when they say in considering the extended timing of additional adjustments. And by the way, Brian, you do add the,

important point here, which is that one of the keys that I've been saying to this meeting is, does Powell affirm that with all the other things that are going on that y'all were talking about in the last segment, tariffs and tax policy and all the other stuff, will he affirm that the direction of travel is still downward? That's really important. Is he still confident that inflation is moving towards the 2% target? Those are the two monetary policy keys as I see them to the press conference is coming up. Quickly, Steve, just to, usually the big mover when we get the statement is also the projections, the dots as I won't call them. But we did not get those this meeting, right? Which makes this a little bit, you know, less for the market to kind of sink its teeth into.

Right. No dots. The dots come four times a year. Four times a year. I have no problem saying dots if they want to fire me for saying dots. By the way, this is a little inside baseball where we had an old boss who didn't like us to say the word dots. I don't actually know what the new policy is. But in any event, They come four times here. There is one question, Kelly. We might ask the chair, which is he did answer it one time, and we said, hey, if you were due the dots now, are the old dots still good? That might be an interesting question.

Though, I don't know that enough has changed now to ask him that question in terms of, you would say, well, I think the two cuts are still something that the Fed would more or less back. Remember, it was a close call last time. Yeah, no, actually, that would be a good question? Would anything maybe change those projections? Steve, thanks. Let's turn back to the panel for more thoughts here.

we will go in reverse order. So Jim, you know, the 10 year, it's up like a couple of basis points, not a huge mover so far. What jumps out to you? So look, I mean, effectively, there's a long period of time between the next meeting. So the next Fed meeting is March 19th. We get a couple of labor reports. We get a couple of inflation data points. We have a new president, new policies that are coming through. I think the Fed is right to be pause and be as really obscure as they possibly can at this point. So what's really jumping out to me, effectively, is how the Fed is thinking about the labor market. I think the inflation component is pretty well entrenched.

It seems like it's relatively low and stable, and that's what I expect. But it's really the labor market. It's all of the adjustments that we get. We get these QCEW adjustments that always adjust things down. So the labor market may not be as strong as a headline number suggest. And I think that's really the worry point for the Fed, is that they're just not 100% certain on how strong the labor market actually is, or is not, and that's going to make them react to hiking or not not hiking, but cutting, more so than

anything else. I don't think a hike is in the equation for this year. Fair enough, Jim, and Dave, I was kind of making a point because the commentary, David, has been so positive. It's kind of weird. We're talking about rate cuts, and the Fed has already cut rates, when a lot of the rhetoric around it is actually fairly good. That said, and I don't want to drag politics kicking and screaming into this, We try to avoid that. There's plenty of other channels that do it. But I think Steve's point was well taken, David, which is that if we don't know what the policies are ultimately going to be around inflation and jobs and immigration, whatever, isn't it much harder for the Fed to do their job? Because they kind of got to wait and see what some of these policies are.

Well, that's right. And if you sort of go back six months ago, I mean, six months ago, you could have said the unemployment is going up, but maybe it's not a lot. problem. Inflation's coming down, but maybe it's going to head towards 2%. Now we sort of settled into really very close to an equilibrium, but it's a hot equilibrium. We've got inflation a little bit above 2%. We've got an unemployment rate pretty low here. And then all the risk in terms of, you know, what do we do in tariffs, what do we do in immigration, what are you do in fiscal stimulus? All of it has a potential for lifting inflation. So from the Fed's perspective, they really don't want to cut here. I think the message is, you know, please don't expect

to cut any time soon from us here. Because the last thing they want to do is have to hike rates or try to hike rates later on the year if they feel like they've overdone it. So I think they'd really like to wait a while here before making their next move. Stephanie, go ahead. I just want to add something very quickly to that, which is that I think the Trump administration is going to suffer a little bit from the lessons learned in the Biden administration. I think if you ask your average Fed official, they'd say, bad, maybe we should have responded a little more forcefully and changed course perhaps a little more quickly when it came to the stimulus from the Biden administration. So I think they'll be a little bit more on their toes about fiscal policy. Now, some of the Trump administration may see that as being hypocritical or however.

But the Fed is really good at fighting the last war. And that's one of the wars they'll be fighting, I think, which is this idea that we need to be on our toes when fiscal policy changes. So true. And I was just, Stephanie, I don't know if the next question will be relevant to that or not, but I was going to say, what for you is the most important date? I mean, is it still jobs report? Is it inflation, consumer confidence? Or is it just like, to Steve's point, what comes out of the White House? Yeah, I mean, of course what comes out of the White House is going to be quite important.

Granted, we might not get information on that right now, which is why the Fed can't really react, and it makes sense for them to not do all that much. From a data perspective, employment cost index this week is going to be very important to gauge to what extent the labor markets are inflationary or not, our base cases. They're not that inflationary right now. But we are worried about the pace of immigration really starting to tighten the labor market. And I think this is not really widely discussed enough. If we really start to see 3.6 million visas roll off over the next two years,

that's likely to tighten the labor market pretty substantially. And it's going to make the job for the Fed quite difficult. Yeah, and I think, Jim, listen, ultimately we can get into these theoretical discussions because we don't know what's going to happen, but I do know this, is that a lot of our viewers and listeners care about what happens to their 401Ks, their 529s, their Roth and other IRAs and their stock funds and whatever it may be. The bond market has kind of done its own thing, right? it's raised rates, even as the Fed has cut rates. So what do you and your team Morgan Stanley see

with rates and equities and bonds going forward? So it's a really good question because effectively monetary policy is no longer the only game in town. Fiscal policy is going to play a major role. This is something that we all have to digest. We all have to take on board and we all have to incorporate into our investment decision-making process. What the Trump administration is trying to do is have easier fiscal policy, taxes, deregulation, things like that, to generate growth and also keep inflation low. Those three things don't often hang together. So essentially, what the Trump administration is trying to do is through deregulation, move some of the activity, business activity, more to the mid-cap sector. So we still like the equity markets. We still think equities are a good

investment, but we think it's true in the broader markets, more in the mid-cap sectors, where some of the deregulation and fiscal growth policies might have the biggest impact. On bonds, we're relatively neutral. We don't think there's going to be a recession, so we think default risk stay relatively low. We think you're going to get the coupon in bonds, but I don't think much more than that. So essentially, it's really a balanced portfolio, but if you ask me, I'm a little bit more optimistic on the outcomes here, and I want to entertain the possibility of an upside. So I'm a little bit more positive on the equity side.

However, it's more in the broader markets, cyclicals, materials, industrials, things of that nature. The mid-cap sector is more so than just large-case. I haven't heard so much excitement for midcaps. I mean, maybe ever. But David, I was going to turn to you also as a wearing your strategist hat. What are the real world investing implications? Well, I think it's not about the economy. It really isn't. The economy is fine in terms of growth and jobs and profits and inflation. The real issue is that we've got some bubbly valuations here. We've got markets which are very concentrated. We've got portfolios which have drifted to be very concentrated. I mean, a lot of people have a portfolio which is much riskier than it was five years ago.

And meanwhile, I've got the potential for some of these administration policies to disrupt things. So I think people should really just don't look at the economy. Look at how you're positioned. Are you basically in too riskier portfolio all said for the world of uncertainty that we have right now? I like risk. Hey, guys. It's the only way to make money. For me, far be it for me to steal Rick's thunder.

I don't know if you have Rick coming up, but it looks like yields are a touch higher. And I'll give Brian the Bingo Award. there seeing this is a little bit hawkish. I think that's the way the bond market, I'm trying to get a beat on the probabilities. It still looks like there's an odds on probability of that second cut in December, which is the thing that's been up and down. But just something worth watching. I got about five bips on the 10 and maybe four or five on the two year as well. So it does look like the market is digesting. This is just a bit awkward. Yeah, it's because the statement, Steve, they removed the cooling of labor and the lack of improvement on inflation. So

Right, exactly. They sort of see those ticks moving, I guess, against them. All right, everybody, let's leave it there for right now. Let's get out to Rick for some more reaction in the bond market. We appreciate it. Steve, Stephanie, Jim Carin, David Kelly as well. Rick, you see this kind of backup in rates. When we say hawkish, it's so interesting to sit here at 211 Eastern,

and a five basis point backup in rates can easily become a bloodbath or we can just end up shaking it off in a couple of hours. Which way do you think this one goes? Well, I think I would consider it much more serious. And it's not how many basis points that were going up, in my opinion, it's where we have been holding. We've been holding four and a half percent. We've been holding four and three quarters in a third year. And there's a lot more going on under the hood. Let's look at an intraday of twos.

Okay, you can see what it's doing. Rates are moving up. But when you hook it into yesterday, what this did was this put today's yields above yesterday's high yield. There's twos. Now look at tens. Same dynamic. Look at a one day, look at a two day. Look at 30s. Look at a one day. Look at a two day. This is significant. The dollar index, as you see, had already traded above its previous days highs. You know, what we are going through right now is, and I'm not sure what I like better when I reference it, are we in uncertainty pricing or are we in disruptive pricing? Take your choice. And in either case,

CNBC loves disruption. We have disruptor conferences. But it seems as though this administration disrupting is a negative thing. It's viewed as negative. And when you look at the notion that everybody seems to bring forth is that all you need to do is change our target

from 2% to 2.5 or 2 and 3 quarters or 3%. It doesn't make a difference. I couldn't agree with any statements more than that. With the debt and deficit issues we have, with the disruptive pricing that we have, should they move the goalpost, you know what's going to happen, in my opinion, the market will penalize them via much higher interest rates. It's a bad idea, and we could talk about it and talk about it. But in the end, if they actually do it or a senior Fed official actually voices it, my word

would be buckle up. Well, the market's already moving, and yields are indeed moving up. They are moving higher. I think it was Alan Greenspan, Rick, that said, if you understand what I said, I must have misspoke. Rick, thank you very much. All right, Bob Pisani, I hope our Fed panel is gone, because I'm going to say something really just inappropriate here. If you're listening on the radio, turn the volume down. You don't want to hear this.

Which is that, Bob, I feel like Invidia right now, like the Fed, we know they're kind of on hold. Invidia's not on hold. Invidia's down, what, it's 5, 6 percent? There's a lot of fears around stuff. So we're not only watching the Fed, and I think the press conference, very important coming up. But there's a lot of other stuff happening under the hood that has nothing to do with the Fed that I think is equally, if not more so important right now.

Including the big rotation we're seeing today. I mean, before this, there was more stocks up than down. And I agree there's obviously some money coming out of Invidia. I just want to point out that up until a minute or so ago, the reaction to the stock end of this was very, very modest. Because I agree with Steve's point, the fact that they left out this sentence, inflation has made progress toward the committee's 2% objective does strike. me is somewhat on the hawk side. And remember, what you want here, and I think David said this

earlier, you want the meeting to be boring. And boring would be Powell's insisting that they are moving towards the 2% objective. Any suggestion that there's not going to be any rate cuts, one or two, or that there might even be a rate hike. That's certainly not in the market. So there's your your big risk right now. The other risk, of course, is Powell could get dragged into some long discussion about tariffs and what I call the swamp of tariffs with Powell. And that might introduce, of course, the probability or the possibility of some kind of accidental volatility, as I like to call it. So there's your two risks right now. Other than that, the handoff for February from the stock perspective is terrific. We have 3% GDP growth. We've got 20% of the earnings coming in. They're

all better than expected. Very high levels of beats that are out. there that we are seeing a terrific rotation in January. Cyclical stocks like industrial and materials are outperforming, health care is outperforming, even energy and financials are outperforming, tech is underperforming. There it is. How many years have been waiting for this story and hasn't happened for more than a few days? Now we're on the verge of an entire month with the S&P up 2.5% led by cyclicals and defensive stocks. That's about as good as it gets.

And finally, I just want to point out, January is positive. What are we up? Two and a half percent so far, Brian, on the month. So, you know, the old saying, this goes January. So goes the year. There we are. Two and a half percent. So he's going to, Powell's going to get asked a lot about the fact that he left out this sentence. And there's where it's going to get very, very tricky right now. And I think the September rate cut, the big half point cut that kind of was a howitzer for, it's a World War II artillery reference. The howitzer, I think, should get, I hope we'll get. more questions. Bob Pisani, thank you very much. Well, folks, we are just moments away from that press conference. Well, maybe we'll get questions on all of this, right? What happened to that reference to inflation? Was the rate cut in September really necessary? Why is the bond market moving this way? Why am I asking so many rhetorical questions heading into a commercial break on television? There's so many questions. It's called a tease. It's called a tease. I hope it was good.

We're back right after this. Welcome back to our Power Lunch Fed Day special. And we are seeing some market moves this hour, in part because of what the Fed just announced. It wasn't the actual decision. It was to some extent the fact they took some language out a little bit hawkish, Dow's at a session low. We also have NVIDIA, a big mover this afternoon on reports the administration may tighten curbs on its sales to China. The company now saying they're ready to work with them on AI. Let's bring in Dom Chu for more, Dom, to help kind of round up what's driving what here.

Yeah, so let's start with those NVIDIA shares on that recent roller coaster ride. continues. Shares of the chip giant are just about session lows right now, as you can see, they're off by about six and a half percent. That yellow line, by the way, is the 200-day moving average. As you can see, we're just right now below it. So it represents one of those key chart levels. Some traders are watching. All of that, as you point out on this Bloomberg report, citing people familiar that the administration has discussed potential tightening of sales curves for Nvidia products to China. But did, though, say the report that the conversations are very preliminary, but it was enough to exacerbate and already down day.

The general story in the chips trades does still remain mixed today. As you can see, their broadcom, Taiwan semi are down, while you see some gains in Intel and AMD. ASML holding, though, continuing solid gains following a better than expected quarterly report and better than expected reads on future orders. And let's count things off with a check on the three of the Magnificent 7 that are actually reporting earnings today. Microsoft, meta platforms, Tesla, each you can see there, just about lower to marginally lower. Each of them reports after the bell. The options, by the way, market

is currently pricing in what could be a 4% up or down move in Microsoft on the heels of that report, a 7% move in shares of meta platforms, and a 9% move in shares of Tesla. So we could be seen some possible fireworks, Brian Kelly, for some of these reports. Tesla's going to be a notable one to watch after the bell. I'll send things over to you. Yeah, and interest rates, as you said, Dom, also move these high valuation and high multiple stocks. So if the Fed moves interest rates, interest rates may move those stocks, which then are big enough to move the whole market. I don't know about your, my brain is exploding, just thinking about it. Dom Chus, thank you very much. As we noted, folks, Don's brain never explodes. It's so big.

All right, we are just moments away from Jerome Powell's press conference. There's an empty lectern. That lectern is not saying anything. But when a human being walks in, into it? He's going to say a lot. Watch out. Watch out. We're back right after this. Welcome back just a couple minutes away from Fed Chair Powell's press conference to explain what turns out to be kind of a hawkish statement top of the hour. They didn't cut rates, but let's talk to Claudia Somm about what they did do. She's New Century Advisors Chief Economist, creator of the SOM rule, a member of our mock Fed panel. Hope you're feeling well. Claudia, it's great to have you here today, especially. Are people reading too much into the statement, do you

think? Yeah, we got to be real careful today not to make news out of what is not news, right? Like, we, coming into this, we knew what's left, inflation. Like, that's what's left. That we got good news on the labor market. Things have gotten better. And all the Fed is doing is telling us that's where we're headed. So I don't, I don't think the statement, the very small changes made to the statement, should come as a surprise or, or tell us something we didn't already know. Like, inflation is still somewhat elevated. So, you know, you're talking to a trading desk right now. And it's, you know, it's like we're pounding stocks lower. We're sending rates higher. This is going to craft the narrative for the next six weeks. What do you want them to be thinking about? Again, I think it's important in the press

conference to take a deep breath, right? The Fed, the actions of the Fed in this has been true for some time, and it will absolutely be truth for this year. It is driven by the data. We do not have the data that will decide when the next Fed cut is. We just don't. And Powell doesn't have it and he's not going to give it. So trying to infer that from what he says is just noise. So we just really need to be careful about, you know, we want to hear that information, but that just is not known yet. So be careful. Yeah, Claudia, here's in, it's Brian Sullivan. Here's the problem I think the Federal Reserve has, somebody who has gone across this great land talking to people. The Fed has no control over a lot of the inflation that we actually feel. I mean, they can't do anything about automobile insurance rates.

They can't do anything about home insurance rates. I doubt they can do anything about health insurance or health care costs, right? We know that eggs are soaring because of avian flu. I just, you get my point, is that we can have inflation data that comes in red hot. And what the heck is the Fed going to do about anything that I just referenced? Well, they do have levers to pull on demand. I mean, that's how interest rates work, keeping them high. They can look at the sum total of inflation, but you're absolutely right. We've had some very specific kinds of cost push inflation. So eggs are a great example of this, where the Fed does not have the precision to go at the root cause of that. And yet they can look at overall, like is demand outpacing supply and are we overheating?

And I mean, we don't see that, right? Like the last mile of inflation does not look like that. But, you know, they don't have the magic one, but they do, they do have the mandate. And they have to keep whether or not it's the kind of inflation that they can fight really well. They have to keep added until inflation comes down. So that means interest rates stay elevated. Do you think the risk this year, Claudia, is more to the inflationary side or the contractionary side? Granted, maybe it can be both. I think there's so much policy uncertainty within the fiscal and the trade policy space.

And honestly, there, you could see it going a lot of different directions with growth. effects or with inflationary effects. I think inflation, if you're really interested in like, what's the path of interest rates, what's the Fed going to do, they're going to be just intensely focused on what happens with inflation. So those are risks that like in a Fed space. But more broadly in the economy, I think we just have a lot of unknowns in terms of what the economic policy outside of the Fed is going to look like this year. And while it won't necessarily be the bottom falls out and so dramatic, it can still be disruptive. And we've kind of. I mean, we're tired. We've had a long disruptive period. So to have more of that facing us is

just, it's kind of a dispiriting way to start the year. Yeah. Well, if the chair feels the way you feel, we'd expect him to kind of push against this and to use the market language almost be dovish. But he tends to kind of reinforce the statement message, Claudia. And sometimes he like, I think he likes to upset markets, frankly, sometimes. I don't think he comes out to make big reactions. And frankly, today, like trying to keep things as calm as possible and stay away from some fairly politically charged topics, which I'm sure he'll be getting about administration, Trump administration policy and Fed independence. So I mean, I think today will be, you know, try and play it cool. But he does need to, the Fed, when Powell speaks,

he speaks for the federal open market committee. So, you know, he needs to convey the concerns that come from the committee. And, you know, again, at this point, with where the data is, where we, you know, where the economy is, being concerned about inflation, first and foremost, Like that, I mean, that's an appropriate. And that's what I imagine we'll hear from him. What you just said is so, well, there, you know what? We'll save it for the next segment.