Economy
There were no changes to the Fed's interest rate this week when the Federal Open Market Committee met this week. While the result was expected, the press conference was highly anticipated. Fed Chair Jerome Powell has been publicly called out by President Trump in recent weeks, but Powell declined to comment on those remarks. Instead, he reiterated that the Fed is focused on bringing inflation down to its target of 2%, and that they are in no hurry to cut rate further until more progress is made on inflation. The next FOMC meeting isn't until March 19, but it's looking increasingly likely that we won't see another rate cut until the summer.
Initial jobless claims declined this week, suggesting continued strength in the labor market. We'll see the monthly jobs numbers for January out on Friday this week, followed up by an inflation reading on February 12. Solid jobs data coupled with sticky inflation is a recipe for the Fed to keep rates steady. We'd probably need to see one, or both, sets of numbers to start to decline to see the Fed take action. The Fed has been independent of political parties, but historically there has been pressure put on the Fed by politicians. Notably, in 1970, Richard Nixon stood alongside Arthur Burns, the then Chair of the Federal Reserve, and said, "I respect his independence. However, I hope that, independently, he will conclude that my views are the ones that should be followed."
Markets
The S&P 500 fell by 1% this week but if I had told you early Monday morning that that would be the result by Friday, I think we all would have felt pretty ok with it. A week ago, a new artificial intelligence called DeepSeek out of China was released, and after being tested and vetted over the weekend, markets opened in chaotic fashion on Monday. There was a sudden realization that AI companies in the US might be spending too much to build out technology that was supposedly built in China for a fraction of the cost and as a "side project" by a hedge fund company. President Trump called the news a "wake up call" for American companies, and it's being referred to as AI's Sputnik moment.
At least in the short term, we heard positive news from some of the largest AI players. Mark Zuckerberg said that Meta won't slow its spending despite the DeepSeek news. Microsoft CEO Satya Nadella said DeepSeek has real innovation and is all "good news" for the industry. Nvidia's CEO Jensen Huang, after seeing his company's stock price crash nearly 20% on Monday, called DeepSeek "an excellent AI advancement." Whether you fully understand AI and the direction its heading or not, this was a major story in the markets this week and took over headlines. You don't have to be an expert in large language models or machine learning, but just know that until now, the US faced virtually no overseas competition in this space. The AI arms race now has the appearance of a foreign adversary, and that can make things very interesting.
What We're Reading
- Notes on DeepSeek - Alex Kantrowitz
- Now What? - WSJ
Have a great weekend.
Dogwood Wealth Management