Nominee for next Fed chief revealed, plus earnings and foreign trade deal updates.
After cutting rates 75 basis points last year and 100 basis points in 2024, the Federal Reserve opted to move to the sidelines this week and held rates steady at a range of 3.50% to 3.75%. In the statement, the Federal Open Market Committee upgraded its characterization of growth from “moderate” to “solid”, no doubt a reflection of the recent pickup in GDP to an impressive 4.4% in Q3 with expectations of 5.4% growth at year-end.
But they conceded job gains have “remained low,” though the unemployment rate has “shown some signs of stabilization.”
Turning to inflation, the Fed acknowledged the “elevated” nature of price pressures in its January 2026 statement. Policymakers noted the “extent and timing” of any additional policy moves will depend on changes in the economic outlook. This language appeared in last month’s statement as well, and echoes language used in 2024 before the Fed put rate cuts on hold. In other words, with no further compelling evidence of additional cooling in the jobs market, the Committee is likely to cease further rate cuts, potentially for an extended time.
Last year, the debate was over how many additional cuts were needed and at what pace. Now, with only moderate softening in the labor market, still-elevated inflation and a stronger GDP growth profile, the conversation has shifted to whether any further policy easing will be necessary. While the market continues to price in about two additional cuts in 2026, the majority of current Fed officials see just one, with seven still forecasting no further adjustments to policy this year.
The big question remains: what’s next?
In our view, unless inflation unexpectedly and meaningfully decelerates or the employment picture unexpectedly deteriorates, policy is likely to be on hold. And even though, by historical standards, these are not high rates, they are above expectations built into the market, which is disappointing investors. Furthermore, medium- and long-term interest rates are reacting more noticeably to debt and deficit concerns. As a result, mortgage and other borrowing rates continue to be elevated, stymieing activity.
With that backdrop, it’s no surprise this morning’s news that President Trump intends to nominate former Federal Reserve official Kevin Warsh to be the next chair of the Fed is catching investor attention. While Warsh was considered an inflation hawk when he served, objecting to extended periods of low interest rates and use of the Fed’s balance sheet following the Great Recession, he has more recently publicly aligned with the president’s push to lower interest rates and has expressed strong support for economic deregulation and government spending cuts. Warsh’s nomination will need to be confirmed by the Senate before he can assume the role to be vacated by Powell in May.
It was interesting to see how Powell handled the question about his intentions to stay on as a Fed Governor following his term as chair. His answer was no comment, but by the way he smiled and kind of shrugged his shoulders, it would seem he probably can’t get away soon enough. Chair Jerome Powell also confirmed he attended the Supreme Court arguments regarding Lisa Cook’s removal, calling it perhaps the most consequential legal challenge in the Fed’s 113-year history. Powell stated that because of the threat to the central bank’s independence, it would have been difficult to explain his absence. Some criticized him for politicizing the hearing.
While the spotlight was on the Fed this week, earnings season has been busy, dominated by mega-cap tech results that were largely stellar, but somehow left investors wanting more. Apple, Meta, Microsoft and Tesla all had amazing results, but in varying ways raised questions that can collectively be summed up as, “can all this AI investment really be monetized?” Those questions have no easy answers, and investors took some air out of big tech trading prices, most notably Microsoft.
It might have been that those of us in areas impacted by last weekend’s storm were exhausted of shoveling and chipping ice, having flights canceled and delayed, or trying to function without power in the bitter cold. AI feels a lot less important when you are trying to dig out 15 inches of snow from your car and you are serving your kids peanut butter sandwiches for breakfast, lunch and dinner.
Turning to other harsh realities, there is word that another government shutdown may be narrowly averted. Following negotiations between Senate Democrats and Republicans and the White House to pass five spending bills to fund a large portion of the government for the remainder of the fiscal year, as well as a stopgap measure to fund the Department of Homeland Security for two weeks while they continue negotiating guardrails to rein in immigration agents, it appears a deal may be struck before the deadline. Democrats are seeking enforcement policy changes after federal agents deployed to Minnesota were involved in the fatal shootings of Alex Pretti and Renee Good.
Finally, it was also notable that India and the European Union finalized a free-trade agreement this week that links almost two billion consumers. The deal will eliminate or cut tariffs for more than 90% of EU goods. Earlier this month, the EU signed a free-trade agreement with the four South American countries that founded the Mercosur customs union and last year it announced a trade and investment deal with Indonesia. Over the past year, the U.K. has announced its own trade deal with India, updated an existing agreement with South Korea and reached a trade-and-security pact with the EU. All these deals are coming at a time when the U.S. dollar is near a multiyear low. While Trump said, “I think it’s great,” about a weaker U.S. dollar due to business activity, Treasury Secretary Scott Bessent reassured that “the U.S. always has a strong dollar policy” based on “right fundamentals” and “sound policies”.
We hope you all find ways to stay warm and safe in this ongoing winter weather, and stay cool and calm about what we see as normal market volatility given recent earnings news and the resulting valuation recalibrations.
Written by a human.