Powell vs. Trump: The Epic Battle for Interest Rates Begins

The Fed probably isn’t cutting rates today, but Powell’s press conference could set the tone for markets. Meanwhile, tech giants report earnings, and Trump’s policies are already shaking things up.

Magnificent-7 versus 4 Horsemen. Today, we will have the pleasure of witnessing at least two of the four Horsemen of the Apocalypse, one returning after Monday’s early showing. Wow, did I just paint a dark biblical picture and apply it to our beloved capital markets? I suppose, I did, but to be clear, I am using the Four Horsemen not so much as to imply that doom is upon us, but rather to indicate that these horsemen have the potential to level pain on your still-happy- for-now portfolios. What, did you not get a whiff of brimstone on Monday? Sure, you did, but thankfully, you did not panic, because, my regular readers, we respond to facts and have long-term focus. 😉

Ok, let’s get to our horsemen. Today is Fed day, the very same Fed that launched its war on inflation starting in 2022 with rate hikes. Those rate hikes were leveled with good intention, of course. Inflation was and still is painful and unfortunately, rate hikes are still the best-known medicine. Like most medicines, the side effects can also be quite… er, painful.  But here we are, fortunately on the other side of that rate-hike war on inflation and the Red Horseman is wielding his sword on the Fed Funds Rate, cutting by a full percentage point last year. That took a bit of pressure off stocks, even though the current Fed Funds Rate of 4.5% is still restrictive to the economy.

However, despite those restrictive rates, the US economy remains rather healthy at the moment. Inflation, while still slightly elevated, appears to be in check as of the last CPI reading earlier this month. Unemployment, also slightly elevated, does not yet appear rampant as of its last reading earlier this month. That brings us to GDP, the ultimate measure of economic output. Q3 GDP readings paint a picture of a healthy economy. This puts our Fed in a comfortable position… to observe. No fires on either side of its dual mandate. In other words, inflation is still high enough to justify keeping rates restrictive and the economy is on stable enough footing as to not require accommodative rates. This is a wait-and-see moment for the Fed, and it said as much in its last major communique in December.

Ok, so it has waited, now it’s January, so what does it see? Well, that is kind of tough given that we won’t get an official read of GDP until tomorrow or an updated view on inflation until Friday. What the Fed can see is that blue chip economists are expecting Q4 GDP to come in 2.7%, slightly lower than the prior quarter’s 3.1% annualized growth. The Atlanta Fed’s GDPnow forecast (a quantitative, machine learning forecast) has been climbing and is forecasting 3.2%, all slightly more bullish than the Fed’s own forecast for 2024. The message with these numbers is that the economy is strong and possibly strengthening. The implication here is that the Fed is not likely to lower rates with the economy powering forward, out of fear that the economy could heat up causing inflation to pick up once again. What about employment? Well, December’s unemployment rate pulled back from the prior month and new nonfarm payrolls exceeded economists’ estimates. We will have to wait until next Friday to get a read on this month, but last month’s numbers paint a picture of a healthy labor market. The implication here is that the Fed is not likely to lower interest rates. All this dovetails well into Fed Funds Futures and overnight swaps predicting that the Fed will not change rates today. This is clearly factored into the markets.

Looking forward, however, the picture becomes less clear. The futures markets are pointing to a May/June timeframe for the next potential rate cut, and a good chance of another one before the end of the year. But we all know that things can change on a dime. All this analysis of what to expect from this month’s FOMC meeting is rather standard fair, but these conditions will obviously change quite a bit before the Fed’s next meeting in March. That’s right. In case you haven’t noticed, the US has a new President who is determined to stir things up a bit. There are those potential inflation-causing tariffs along with possible labor-force disrupting, inflation-causing immigration policies. Yes, inflation causing. Will the Fed have to keep rates higher for longer yet, or possibly, rear its horse around to consider rate HIKES? Yikes.

What about President Trump’s Zoom call with world leaders in Davos, demanding that interest rates be lowered, immediately. Does “immediately” mean today? The Fed is independent, setting policy based on numbers and not political jawboning, but will this long-standing policy of independence hold, or will the Fed cave under pressure by the President? Well, you can bet that all the fireworks will happen during Powell’s press conference this afternoon. Reporters will surely press the Chair to provide some color on how much influence the President’s words and policies have on Fed Strategy. The questions will undoubtedly cover politics and policies. Will yesterday’s spending cut announcement impact Fed decisions? Will the President’s strategy to lay off government workers through some sort of buyout, announced yesterday, soften the labor market, and weaken the economy, ultimately warranting a more accommodative Fed policy?

Folks, this afternoon’s press conference will, indeed, be one of Powell’s most challenging. He will have to instill confidence in investors while holding rates steady and restrictive, while going against the cries of a popular President, who is urging him to cut rates. He will have to answer questions of Fed policy effectiveness with prices still high.

As the Red Horseman rides off, the Black Horseman will ride through as we get some critical post-market earnings. Namely, four of the Maginificent-7, whose fate was very much in the lurch earlier this week. The performance of these first four will set the tone for the rest of the broader tech sector, and indeed, the overall market. Will this afternoon’s events herald a visit from the Pale Horseman? Probably not, but we should pay close attention just in case… given the stakes.

YESTERDAY’S MARKETS

Stocks hit hard on Monday surged back yesterday as once-panicked investors thought better of Monday’s ambiguous news. Gloves are off, rightly so, as Government Agencies lay hints of an assault on Chinese upstart DeepSeek while the Navy banned the app, and Microsoft along with ChatGPT launched an investigation into the possible theft of its data by the new competitor. The Trump Administration got busy yesterday on making good on promises to shake things up in DC, issuing countless proclamations aimed at cost savings, though it is unclear if the bolt will ultimately hit its mark, as the moves drew countless lawsuits and court injunction—more noise in an already noisy environment.

NEXT UP

• At 2:00 PM Wall Street Time, the FOMC will announce its rate decision on policy statement. Though all odds are in favor of rates remaining unchanged, investors will carefully scrutinize the policy statement along with Chair Powell’s every word in his post announcement presser, scheduled for 2:30. You will know that the press conference is taking place just by watching the market, which is sure to be undulating throughout.
• Markets won’t get too much rest before key earnings are announced post market. Important earnings announcements today include Corning, ADP, Lennox International, Otis Worldwide, Norfolk Southern, Danaher, General Dynamics, VF Corp, IBM, Waste Management, Lam Research, Tesla, Meta, Microsoft, Levi Strauss, Western Digital, United Rentals, Las Vegas Sands, and Whirlpool.

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