Fed Takes Back Seat but Reveals Surprising Inflation Concerns

I cannot remember the last time the FOMC meeting was generally viewed as a “non-event” and it, in fact, turned out to be a “non-event.”

The statement was somewhat hawkish, but the press conference undid much of what spooked the market in the statement. The FOMC's decision remains a balancing act between inflation and jobs.

The one “twist” I took away is that they are more concerned about their ability to get inflation down than they have expressed in the past. I’m not sure that is a valid fear, but Chair Jerome Powell seemed more concerned than at recent meetings, despite several important inflation metrics moving lower.

Maybe it is because of “overall price levels.” He really seemed, for the first time that I remember, to understand that 2.2% versus 2.5% inflation isn’t what is driving the consumer crazy. It is that inflation was so high and price levels are so high that almost any level of inflation is painful. While he didn’t address it, maybe he finally believes what we have been saying for some time – however bad the official data has been, the real world experience has been worse.

I expect cracks to develop in the job market, which may give the fed the ammunition they need in the coming meetings, but it wouldn’t be a good thing.

President Trump’s expected policies are influencing economic data today. Pre-purchasing goods ahead of anticipated tariffs is possibly the best example. This is making it difficult, although policies are not yet in place, because the anticipation of them is already occurring.

Expect friction between this administration and the Fed, but so far I haven’t seen anything particularly out of the ordinary (given that we already knew Trump would be more vocal).

Earnings and AI

Earnings started coming out, with TSLA, META and MSFT releasing reports on Wednesday night.

From their post earnings release trading, two things seem clear:

Guidance is far more important than the numbers themselves. We are, after all, pricing in future discounted earnings, but it seemed quite pronounced on Wednesday that it is all about guidance.
The future of AI and “cheap AI” is the big question at hand. If cheaper AI is the path we are headed on (and it seems possible that we are, as Alibaba also announced new and improved AI), it should benefit much of the world. I expect it will have to be done by non-Chinese companies for corporate America to embrace (if the claims are real), but that should not take too long, given the open-source architecture and the power of AI to synthesize things. The efficiency gains could fuel growth for corporate America — so, I think the equal weighted indices are poised to outperform — potentially by a wide margin.

Some stocks were hit on Wednesday as the president commented on the possibility of restricting the sale to China of more types of chips (not quite state-of-the-art chips). I remain convinced that the president is only now starting to hear (and take into account) national security issues and that may make him harsher on chips and tariffs with China than the market has priced in.

At the same time, the production and processing of commodities and rare earths/critical minerals remain a priority. It will take time to get this rolling, but I still like the investments that benefit from this.

Finally, I am almost fully allocated to closed-end municipal funds. I’ve been buying managers that I trust, diversifying the portfolio across managers, and even across funds from a single manager, to achieve a current yield above 7% on average.

Even with recent pullbacks, the risk to the downside for the Nasdaq 100 is greater than the upside risk, but value, equal weight indices and maybe even disruptive stocks are something we can look to.

I think 10-year yields are a bit too low, but not alarmingly so, which is why I’ve been topping up my closed-end muni allocation.

I hate to say it, but when I see positive headline after positive headline on bitcoin adoption, I’m not sure why it is “stuck” at “only” $105,000. I cannot bring myself to pull the trigger, but it seems like a possible buy given how many in this administration seem crypto friendly (and how the crypto community seems to have really realized the power of campaign donations at all levels of government).

It is refreshing to have a Fed meeting, and for it not to be the key driver!

At the time of publication, Tchir had no positions in any securities mentioned.