The Fed holds rates steady … Trump tariffs are the big unknown today … more DeepSeek analysis from Louis Navellier … good news on the 10-year Treasury yield
Today, the Federal Reserve kept interest rates steady at the current target rate of 4.25% – 4.50%.
This was widely expected. Going into the meeting, traders put 99.5% odds on no changes to the fed funds rate.
As to where the Fed goes from here, its approach boils down to “wait and see.”
In his live press conference, Federal Reserve Chairman Jerome Powell noted that because interest rates are now “significantly less restrictive” than they were before cuts began last fall, “we do not need to be in a hurry to adjust our policy stance.”
When asked about the timing of the next rate cut, Powell deflected, not allowing himself to be boxed into any corners. However, he did maintain an optimistic, confident tone about the path of inflation and his expectation of further progress.
I’ll note that traders are putting the heaviest odds (32%) on two quarter-point cuts this year. This is unchanged from yesterday. As to the timing of the first cut, most traders are pegging June.
Several reporters asked about President Trump’s recent comment that he would “demand” lower interest rates. Powell sidestepped the question, noting “I’m not going to have any response or comment whatsoever on what the president said. It’s not appropriate for me to do so.” He redirected, saying:
The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals and really keeping our heads down and doing our work.
Apparently, Trump doesn’t need Powell to be combative to escalate the tension. As we’re going to press, I’m reading that Trump has just slammed Powell, saying that he and the Fed “failed to stop the problem they created with Inflation” and that they’ve done a “terrible job on bank regulation.”
We’ll follow up on this later this week in the Digest.
Barring these late-breaking comments from Trump, it was a rather uneventful meeting and press conference because – as noted at the top of this Digest – it largely reduced to “wait and see.”
And on that note, there’s one central issue that Powell & Co. are waiting to see about…
Trump’s tariffs.
How the Fed is managing tariff threats
Trump has threatened to implement a 25% tariff on all imports from Mexico and Canada, anywhere between 10% – 60% tariffs on all goods from China, and another 10% – 20% tariffs on all other goods entering the U.S. Plus, in recent days, we’ve heard additional saber rattling about tariffs on good imported from Colombia and Taiwan.
When asked about the impact of Trump’s potential tariffs earlier today, Powell responded:
The range of possibilities is very, very wide.
We don’t know for how long or how much, what countries. We don’t know about retaliation.
We don’t know how it’s going to transmit through the economy to consumers. That really does remain to be seen.
There are two inflationary angles here that could complicate the Fed’s path forward…
First, we have the actual tariff-related price increases themselves. For example, take avocados.
About 90% of the avocados eaten here in the U.S. come from Mexico. If you love them on your salad or in your burrito, and Trump slaps Mexico with a 25% tariff, your meal just got more expensive. This is inflation in action.
Second, there’s the expectation of accelerating inflation that is dangerously self-actualizing.
Inflation has a huge psychological component. If consumers become convinced that inflation will worsen, they’ll buy goods and services today at prices that they believe will be lower than prices tomorrow.
Of course, it’s this very buying pressure that results in higher demand, fueling the exact price increases that consumers fear. It’s a self-reinforcing feedback loop.
This perceived threat of inflation, without being checked, turns into inflation in action.
We’re facing both real and perceived inflation risks
Trump has spoken frequently about tariffs in recent weeks, threatening to implement them on Canada, Mexico, and China this coming Saturday, February 1. Will he?
The answer could have a substantial impact on Fed policy.
Consider the enormity of U.S. imports from China and how new tariffs would impact prices for all sorts of goods throughout our entire economy.
If you’re a U.S. supply-chain executive relying on foreign components, how do you make cost-effective purchase forecasts with these uncertainties?
If you’re a Main Street consumer looking to make a big-ticket purchase, what do you do?
Returning to the Fed, if you’re Powell, trying to guess how these executives and consumers will behave based on their expectations of inflation, do you make preemptive moves or wait until tariffs have been implemented? Both approaches carry risks.
In his press conference this afternoon, Powell sided with the “wait and see” approach:
We need to let [tariff] policies be articulated before we can make a plausible assessment.
We are going to be watching carefully.
How Trump may or may not implement tariffs is a wildcard
An article in The Wall Street Journal made an interesting point comparing inflation in 2018 with potential inflation today. The difference boils down to how Trump might enact tariffs.
In 2018, various Fed economists modeled the impact of a tariff increase. The takeaway was that the Fed could ignore higher inflation readings if two conditions held up: Inflation expectations remained low, and the price increases from tariffs flowed through the economy fast.
The idea was that one-time tariffs, implemented at the same time and never repeated, would result in a one-time price jump, but then inflation would go away. So, we’d be left with higher prices, but those prices wouldn’t rise much from there.
Today, there’s different modeling, which increases the challenge for the Fed.
Here’s The Wall Street Journal:
If tariff increases are applied at different times to different countries and on varying goods, it could be harder for the Fed to tease out whether prices are rising because of tariffs or whether broader macroeconomic forces were responsible.
“Will it be a ‘one-and-done’ or will it be two years of a sequence of tariffs in many different sectors of the economy?” St. Louis Fed President Alberto Musalem said in an interview this month.
“If it’s over two years, incrementally, every month or every two months, it gets harder to parse out.”
This is the challenge facing the Fed.
All eyes are on this Saturday, and whether Trump will follow through on his prior tariff threats.
We’ll keep you updated.
More developments from the DeepSeek drama earlier this week
As you’re aware, on Monday, leading U.S.-based AI stocks sold off sharply when news of China’s DeepSeek AI platform shocked investors. The selling reduced to three primary fears:
- DeepSeek’s alleged cost advantage meant incumbent U.S.-based AI platforms were vastly overspending on their AI initiatives
- DeepSeek’s lower-cost AI platform would mean far less spending would be required to develop AI systems, which would result in lower profits within the AI ecosystem
- DeepSeek’s ability to operate with greatly reduced energy consumption would kneecap energy/datacenter plays
Let’s zero in on the third fear, since datacenters has been an investment opportunity we’ve highlighted and endorsed many times in the Digest.
Here’s Reuters:
The wider adoption of AI models like the one developed by DeepSeek, which it says it built in under two months and is cheaper than models currently used by U.S. companies, could result in less electricity demand overall and result in a smaller power build-out, analysts and economists said.
“If proven true, the efficiencies used within DeepSeek’s open-source model can be applied by the hyperscalers to their models, which would result in a more moderated demand,” analysts with Evercore ISI said in a note…
Independent power provider Constellation Energy (CEG.O), whose shares had shot up about 100% in 2024 largely on its ability to sell nuclear and gas-fired power to U.S. data centers, sunk by about 20% in trading on Monday after news of DeepSeek’s advancements.
Now, we shouldn’t take this lightly, but if you’re thinking about selling your energy/datacenter stocks, hold on.
Let’s go to legendary investor Louis Navellier. From his Growth Investor Flash Alert yesterday:
Right now, AI is controlling about 10% of our power grid, and it’s going to get more and more over time. The biggest victims of the DeepSeek AI reaction were companies involved in building out the power grid…
But when you look at the utility grid and the data centers, this is a big, long-term thing. You don’t just stop development.
To Louis’ point, below is a chart from Edward Jones showing the forecasted energy requirements measured in terawatt hours for U.S. datacenters over the next five years.
Even if DeepSeek’s technology can reduce energy usage, we’re still likely facing substantial energy demand.
Given data like this, here’s Louis’ take on the market’s response to DeepSeek:
The reaction was ridiculous, and I expect most of the [top-tier utility grid and the data centers] stocks to be up 20-30% by the time the earnings come out.
They’ll pop. We’re going to get a big bounce back.
This echoes one of our takeaways in yesterday’s Digest: Some of the market’s top AI stocks suddenly went on sale this week, and you’ll want to consider taking advantage.
I was on a call with InvestorPlace analysts Tuesday morning, and the collective sentiment was “this selloff is a gift – back the truck up.”
If you’d like to join Louis in Growth Investor for which datacenter/energy opportunities he’s bullish on in the wake of the selloff, you can learn more here.
Here’s his bottom line:
I think this is a huge overreaction. Please remember that markets are manic crowds, and sometimes the market reacts and doesn’t think…
I just want you to hang on and enjoy the ride… I don’t think DeepSeek is going to dominate things.
Finally, one silver lining from the DeepSeek rout … the 10-year Treasury yield fell
As regular Digest readers know, the 10-year Treasury yield is single most important number in the global financial market. The higher it climbs, the more pressure it puts on most stock prices because a higher yield means a higher discount rate, which lowers the current valuation of a stock.
Earlier this week, when scared tech investors bailed out of AI plays, much of that money went into “risk free” bonds – specifically, the 10-year Treasury. All that buying pressure meant that bond prices rose…which pushed yields lower.
The 10-year Treasury yield fell from a high of roughly 4.65% last Friday to 4.50% on Monday after the DeepSeek news broke.
As I write Wednesday, the yield has edged slightly higher but remains at 4.52%. And if we step back, the 10-year Treasury yield has fallen from almost 4.80% in mid-January.
This is a solid tailwind for stocks. And if this trajectory continues, it should support additional gains in the coming months.
The wildcard is inflation…which brings us full circle to Trump, tariffs, and the Fed.
We’ll keep you updated here in the Digest.
Have a good evening,
Jeff Remsburg
