The Federal Reserve will conclude its first meeting of 2025 later today, and Chairman Powell will hold his usual afternoon press conference. Some market observers are describing this as the least suspenseful meeting of the past three years, and I agree with them. The current consensus (almost 100%) opinion is that the Fed will leave the fed funds rate unchanged. After almost three years of DKI being much more hawkish than most market observers and the mainstream press, public opinion has come around to our point of view.

 

I thought the Fed started lowering rates too soon, and the CPI started rising almost immediately after the first rate cut in September. With the 10-year Treasury yield rising around 100bp (1%) since the Fed began easing (lowering rates), additional Fed cuts into rising inflation would be unwise and counter-productive. With real interest rates (the fed funds rate less the CPI) back under 2%, I’d consider raising rates if I were in the room with the Fed Governors. However, raising interest rates so soon after beginning an easing cycle would be embarrassing and isn’t going to happen.

 

I’ve previously written that the Fed has made an error in giving up the appearance of being politically neutral. Reducing the fed funds rate just before the election made some think the Fed was favoring Democrats. I also wrote that the economic plans of both parties involved massive overspending and that no matter who the country voted for last November, we should expect more inflation. Unfortunately, the Fed has acted like the coming overspending of the current Administration is more inflationary than the overspending of the past Administration. In fairness, the Fed is also looking at potential unspecified trade tariffs, but both parties have participated in debasing the dollar, and I believe the Fed would be better off making fewer political comments in public.

 

On the other side of the “discussion”, President Trump has recently insisted that the Fed and other Central Banks reduce interest rates immediately. Trump uses economic growth and the stock market as his scorecard, so I can understand why he wants this outcome. However, he has neither the power to compel any central bank to reduce interest rates, nor to fire Chairman Powell. In this situation, I believe putting public pressure on Powell and the Fed to be counter-productive. I would also note that the Fed only controls the overnight rate and should the bond market start factoring in even higher future inflation, longer-term bond rates and mortgage rates will rise in the event of a Fed cut. President Trump’s preferred policy may produce the opposite of his intended effect.

 

The Fed claims a “dual mandate” of stable prices and low unemployment. Several decades ago, “stable prices”, which means an inflation rate of zero got redefined as 2% inflation. The second mandate of low unemployment is admirable, but also a made-up goal that was never part of the original intention of the Fed. While official unemployment is currently low, the Fed has to be observing that the employment situation is weakening. Jobs available have been declining for a long time, voluntary quits are down, and wage gains are declining. As DKI has pointed out for more than a year, the main reasons for job growth have been increases in government spending and more people taking on additional part-time jobs. Neither debt-fueled spending nor people working more to make ends meet are signs of a strong economy.

 

The conclusion is that with inflation rising and the Fed’s stated concerns about President Trump’s spending plans and the potentially inflationary impact of potential tariffs, the Fed isn’t in a position to cut rates. With employment weakening and massive growth in government interest expense, the Fed isn’t in a position to raise rates.

 

Here’s what I expect we’ll see this afternoon:

• The fed funds rate will remain unchanged.
• The Fed will reiterate that it remains committed to returning inflation to the 2% target and also comment that it is carefully watching the employment situation for further signs of weakening.
• During the press conference, a reporter will ask Chairman Powell if he will resign if requested to do so by President Trump or if he will leave his position if Trump attempts to fire him. As he did last time, I expect Powell to respond clearly that he will not step down.
• Reporters will likely ask Powell how the Fed will respond to future Trump tariffs. Powell is likely to respond that the Fed will respond to actual implemented policy, and not general talk about what the White House might do in the future. Given President Trump’s history of threatening tariffs to get accommodation on other issues, I think this is not only the likely response, but a wise one as well.
• As the market is convinced the Fed is going to “pause”, I do not anticipate making any changes to the DKI portfolio based on the Fed policy decision.

 

Should events be materially different from the above expectations, I’ll update DKI subscribers later in the day.

 

For those of you with questions and opinions, you are always welcome to reach me at IR@DeepKnowledgeInvesting.com

 

 

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