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Wall Street Faces Distracting News Amid Fed’s Steady Course
There were a lot of distractions for Wall Street this week…
This week, Wall Street was impacted by various distractions, primarily fueled by the headlines surrounding DeepSeek, which caused many stocks to decline.
As I mentioned on Tuesday, the Chinese company created turmoil on Wall Street, leading to significant downturns for AI chip manufacturers and server providers. However, the biggest losses were felt by companies involved in building electrical grids and constructing data centers.
This irrational panic dominated the spotlight, overshadowing two other major events.
Firstly, the Federal Reserve was scheduled to announce its latest policy decision on Wednesday. Secondly, the earnings season began to heat up with four of the seven Magnificent Seven companies set to report. (I’ll discuss them in more detail in tomorrow’s Market 360, so stay tuned!)
Suddenly, worries about the future of the U.S. artificial intelligence industry overshadowed conversations about the Fed’s policies and quarterly earnings reports. (Our experts provided insights on the DeepSeek news in a roundtable discussion, which you can view here.)
As a result, the Fed meeting took a back seat to the week’s events. No significant changes to key interest rates were anticipated, and market reactions often become volatile in times of panic—much like a toddler’s attention span.
It’s crucial for my readers to stay grounded in rationality. There are important insights to draw from the latest Fed meeting. In today’s Market 360, we’ll examine the Fed’s unanimous decision to maintain interest rates and what it plans to monitor closely in the coming months, particularly regarding actions from the Trump administration.
Fed Maintains Interest Rates – No Surprises Here
On Wednesday, the Federal Reserve voted to keep its key interest rate range at 4.25%-4.5%. This decision was anticipated, as the CME FedWatch tool indicated a 99.5% probability of no change.
However, a closer look at the Federal Open Market Committee (FOMC) statement reveals a few interesting adjustments. The central bank removed phrasing that suggested inflation had “made progress” towards the Fed’s 2% target, instead stating that “inflation remains somewhat elevated.”
The description of the labor market also shifted. Previously, the Fed indicated that unemployment had “eased.” Now, it characterizes the jobless rate as having “stabilized at a low level,” with overall conditions labeled as “solid.”
Simply put, the Fed remains committed to being data-driven. Currently, they see no justification for a rate cut based on the prevailing data.
During the post-meeting press conference, Fed Chair Jerome Powell indicated a “no hurry” attitude towards policy changes, suggesting that rates are “significantly less restrictive” than prior to last fall’s reductions.
President Trump responded to the Fed’s decision by criticizing both the Fed and Powell for not effectively managing the economy, claiming they “failed to stop the problem they created with Inflation.”
Overall, it appears that the bar for further cuts has been raised. Powell and his team need more convincing evidence that inflation is trending towards their 2% target.
This morning, we received new data on the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index. It showed prices have remained largely stable, with core PCE, which excludes food and energy, rising by 0.2% in December and 2.8% over the past year—both figures met expectations.
We expect clearer insights on interest rate cuts during the March FOMC meeting when the Fed releases its next “dot plot” survey. It is widely believed that at least two more cuts will occur this year if inflation continues to ease. Many Fed officials anticipate inflation will decrease through 2025.
Further Rate Cuts Ahead
Traders, according to the CME FedWatch tool, are already speculating about at least one—possibly two—quarter-point cuts by June. This might be influenced by the 10-Year Treasury yield, which has dropped from a recent peak of nearly 4.8% to about 4.5% as of now.
This decline in the bond market is significant. I believe interest rates will likely continue to drop, especially as other central banks lower their rates. This could lead global bond investors to buy more U.S. Treasuries, as the Fed typically does not resist prevailing market conditions.
In summary, further rate cuts are on the horizon. Although they may happen later this year, it is quite feasible to see up to four quarter-point cuts.
The Trump 2.0 Factor
Currently, the Fed is exercising caution, waiting to see how the Trump administration’s policies will unfold, especially regarding tariffs, taxes, and immigration, all of which could influence the U.S. economy.
Powell emphasized during his press conference the need to understand these policies before making any reasonable assessments of their potential impact.
Trump has been vocal in urging the Fed to lower interest rates. However, Powell has generally avoided engaging in political discussions.
Meanwhile, the focus turns to tariffs, as Trump threatens a 25% tariff on all imports from Mexico and Canada starting tomorrow, February 1. Earlier in the week, there were indications he would delay until March 1, but those were dismissed by the administration today. Additional tariffs against China have also been mentioned.
Trump claims these actions are aimed at curbing undocumented migration and the influx of fentanyl. Historically, he has used tariffs as strategic negotiation tools, potentially building leverage for better deals. Although Canada and Mexico have indicated a willingness to retaliate to any tariffs, such actions would likely hurt their economies more significantly than the U.S.
Ultimately, I believe Trump seeks a compromise. We will gain more insight tomorrow regarding the imposition of the tariffs on Canada and Mexico.
This backdrop is one that the Fed is currently navigating. Over time, I believe they will understand that these tariff threats serve as negotiation tactics, and any tariffs imposed are unlikely to lead to inflation, especially with the U.S. dollar’s strength.
Focus on the Fundamentals
While we monitor these developments, it is vital to remain focused on what truly matters right now—earnings.
Earnings are expected to grow significantly, with projections showing strong results for each quarter of 2025. FactSet estimates average earnings growth of 11.3%, 11.6%, 15.3%, and 16.6% for each of those quarters, respectively, with an expected average growth of 14.8% for the entire year.
Moreover, my Growth Investor stocks are projected to outperform the S&P 500 significantly this year, demonstrating impressive average annual earnings growth of 509% and annual sales growth of 23.8%.
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New Opportunities Emerge as Analyst Predictions Surge for Growth Investor Stocks
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Click here now to access my latest research and discover how to get the newest issue of Growth Investor.
Sincerely,
Louis Navellier
Editor, Market 360
