The Fed maintains its target rate … is the Fed fighting an illusory war? … the deflationary pressures today … a trade deal – but not with the U.S. … the risk of a coming supply crunch
Today, members of the Federal Reserve held rates steady as was widely expected. The target fed funds rate remains at 4.25% – 4.50%.
The uncertainty was what Fed Chair Jerome Powell would say in his press conference. Here’s the TLDR (“too long, didn’t read”) synopsis:
We don’t know whether inflation or the labor market will deteriorate first. We’re going to wait to adjust policy until the data point us one way or the other.
Here’s the official language to describe this position in the policy statement:
The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen…
In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
During his press conference, Powell largely restated the same point in different ways in response to reporter questions…
The economy and inflation are in pretty good shape… tariffs have created enormous uncertainty… the risk of higher inflation and higher unemployment have climbed… we don’t know how this will impact our dual mandate… we’ll watch the data and make appropriate moves if/when something begins to break… give it time.
As to signals about a June rate cut, nothing in the official statement nor Powell’s live comments could be interpreted as especially supportive of one. Rather, phrases like “good position to wait”, “can be patient”, and “wait and see” peppered Powell’s comments.
And in fact, traders are immediately changing their bets on a June cut…
According to the CME Group’s FedWatch Tool, yesterday, traders put 68.8% odds on the Fed holding rates steady in June. As I write, only minutes after the end of Powell’s live remarks, those odds have already climbed to 76.7%. I’ll add that a few minutes ago, they were 75.3%.
(For some amazing perspective, one month ago, traders put 99.2% odds on at least a quarter-point cut in June.)
Bottom line: Today’s Fed response boiled down to “if it ain’t broke, don’t fix it” – despite their admission that the odds of something breaking are rising.
According to legendary investor Louis Navellier this is a mistake.
Why Louis says the Fed should have cut rates
Regular Louis readers know that he’s been railing against the Fed for weeks, saying that Powell & Co. should be cutting rates.
Behind this conviction is Louis’ belief that the Fed is fighting a war against nonexistent inflation. If anything, deflation is the greater concern today.
To unpack this, let’s begin with the recent acceleration of imports.
President Trump wants to reduce the United States’ trade deficit. Ironically, his stop/start on tariffs has exacerbated the imbalance by causing importers to flood product into the U.S. ahead of “reciprocal” tariffs. This has widened our trade deficit in the short term.
Here’s Louis from yesterday’s Flash Alert podcast in Growth Investor:
[Foreign countries are] dumping goods on America.
We just got the latest evidence – we knew it was bad in March, but we didn’t know it was this bad. The trade deficit rose 14.5% from February to March to $40.5 billion. So, the dumping of goods is accelerating.
Just so you know, the trade deficit is now double where it was a year ago, despite the fact that we’ve had a 23.3% increase in exports.
This is going to cause another downward revision to first-quarter GDP because trade’s a big part of GDP calculations.
This inventory dump is inherently deflationary. After all, “more supply” meeting “constant demand” means “lower prices.”
Now, if/when this inventory glut disappears, that’s when “less supply” could be inflationary (more on this later). But Louis anticipates trade deals will have materialized by then.
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Further supporting his point about deflation, Louis points toward commodity prices which are falling (except gold)
The biggest example is oil.
On Monday, the price of West Texas Intermediate Crude (the U.S. benchmark) fell below $56.00. Prices have fallen roughly 20% this year.
Lower oil prices don’t just benefit the U.S. consumer at the pump. Oil/gas is used in countless sectors as an ingredient in all sorts of consumer goods (to name a few: cameras, coffee makers, golf balls, lipstick, sunglasses…it’s an enormous list). So, here again, lower prices support a deflationary outlook.
Next, Louis points toward the frozen housing market. He notes that homebuilders have started discounting their prices to move inventory. Those lower prices will bring down the owner’s equivalent rent in our inflation reports (Consumer Price Index and Personal Consumption Expenditures price index).
Put it altogether and here’s Louis’ bottom line:
You have evidence of deflation everywhere and yet the Fed wants to fight mythical inflation that hasn’t materialized…
I’m still in the camp of four Fed rate cuts this year, due largely to collapsing interest rates in Europe…
If they keep talking about inflation in the future that may never show up – I think that’s highly controversial.
All eyes on June…
The latest on trade deals
As we’re going to press, I’m reading the headline “Nvidia shares climb on report Trump will end chip export restrictions” however there are no details yet.
We’ll bring you more on this tomorrow.
While this is welcome news, the broader takeaway remains the same as it’s been for days: We have headlines pointing toward trade deal optimism and progress, but no specifics or signed deals.
On Monday, it was U.S. Commerce Secretary Howard Lutnick saying he felt “really, really good” about the nation’s economic outlook and potential trade deals, noting “Donald Trump will change the way trade is done.”
On Tuesday, it was Treasury Secretary Scott Bessent. Here’s Bloombergwith those details:
[Bessent] signaled negotiations with several commercial partners are going well…
Bessent said many countries have good offers, reiterating that some deals may be announced as soon as this week.
He also noted the possibility of a “substantial reduction” in tariffs on US goods…
And this morning, we learned that Bessent and U.S. trade representative Jamieson Greer will meet with Chinese negotiators in Switzerland this week to discuss trade.
Bessent assuaged Wall Street fears saying, “We don’t want to decouple, what we want is fair trade.”
In the background, the global trade chess board is shifting
Yesterday, news broke that the UK and India have struck a trade deal.
British Prime Minister Kier Starmer said, “Strengthening our alliances and reducing trade barriers with economies around the world is part of our Plan for Change to deliver a stronger and more secure economy here at home.”
Also yesterday, The Wall Street Journal reported that more countries are negotiating new trade deals with one another. The piece quotes a senior fellow at the Peterson Institute for International Economics, saying:
The U.S. is acting as an accelerant to the lowering of tariffs by everyone else.
Regular Digest readers know that we’ve been wondering about our trade deals – rather, the lack of any of them.
But perhaps there’s a bullish outcome we haven’t considered: a one-time dump that takes the market by surprise.
Let’s go to President Trump yesterday:
We don’t have to sign deals. We could sign 25 deals right now.
We don’t have to sign deals. They have to sign deals with us…
We’re going to put down the price that people are going to have to pay to shop in the United States… We’re just going to put down a number and say this is what you’re going to pay to shop. And it’s going to be a very fair number…
One day we’ll come [to the press], and we’ll give you 100 deals.
Though it’s likely that Trump is speaking off the top of this head, it’s an interesting idea.
If the Trump administration suddenly announces, say, three signed deals at once, that’s going to shock the market in a wonderfully bullish way.
It wouldn’t be unheard of for Trump – ever the showman – to tee up such a dynamic.
While we’re hopeful of such an outcome, in the meantime, the countdown has begun toward a supply crunch
Yesterday, not far from where I live in Los Angeles, the last cargo ship carrying Chinese goods unencumbered by huge tariffs reached port.
The sudden drop-off in shipping is eye-opening. Here’s 4 News Los Angeles:
As the ports of Los Angeles and Long Beach this week begin to feel the impact of tariffs imposed on foreign goods by the Trump administration, a reduction in traffic and cargo was visible at the busiest ports in the U.S. on Monday.
Port officials said traffic is down nearly half at the two Southern California ports, signaling that there are fewer products now in LA from China and that there will be fewer jobs.
“We are at a point of inflection. It’s kind of dire,” Mario Cordero, port of Long Beach CEO said Monday.
“What happens here is going to be an indication of what’s going to occur in the supply chain. We have less vessel calls, less cargo now.”
Let’s jump to Newsweek from last Friday with the impact of these reduced vessels and imports:
A sharp decline in imports, driven by the administration’s trade policies, could lead to empty store shelves in May.
Port authorities have warned of a “precipitous” decline in shipping volumes into the U.S., noting that several major retailers were “stopping all shipments from China based on the tariffs.”
Clearly, this is a problem, but likely a bigger one than you realize.
Even if the Trump Administration signs trade deals with every country in the world – except China – you’ll feel it in your wallet. That’s because most of the everyday goods you purchase via Amazon are China-sourced.
As you can see below with data from Statista, 71% of all items sold on Amazon are made in China.
Source: Statista
So, yes, we want trade deals – loads of them. But we really need either a deal with China or a fast substitute, which appears unlikely.
If not, some of your everyday shopping items may no longer be on those cargo ships…and eventually, on store shelves (or in Amazon carts).
But…
As Louis noted earlier, we have a supply glut right now after businesses frantically imported product into the U.S. ahead of tariffs.
So, how will this play out?
If a trade deal with China materializes while we’re sitting on excess inventory, we’ll see a burst of deflation. The Fed will breathe easier about inflation and likely cut rates, and the market will applaud. Cue a summer rally.
But if there’s no deal with China even after our inventory surplus is depleted, fewer cargo ships will be bringing half the product at double the cost, impacting store shelves, prices, and your wallet.
Such an undesirable outcome is why Bessent has called the 145% tariff on Chinese goods “unsustainable.”
All eyes on Bessent’s negotiations in Switzerland this week. We’re crossing fingers.
Before we wrap up, let’s circle back to Louis for how to make money in this chaotic market
In volatile marks, it helps to refocus on what matters – earnings. This ties into Louis’ “Iron Law of the Stock Market.” Here he is explaining:
Stock price trends can diverge from earnings trends for a while, but over the long-term, if a company grows and grows the amount of cash it takes in, its share price is sure to head higher.
One example from this earnings season is one of Louis’ holdings in Growth Investor Vertiv (VRT) which recently popped on strong earnings.
(Disclaimer: I own Vertiv.)
If you’re less familiar, Vertiv is a leading provider of critical infrastructure solutions for data centers, communication networks, and industrial environments.
Here’s Louis:
Not only did Vertiv beat [earnings forecasts], it said the demand for the AI datacenters was very strong.
The stock is up 14% in a week and a half. It’s just another example of how earnings strength can cut through market chaos.
But it’s not just Vertiv. Here’s Louis from his recent Growth Investorweekly update:
Earnings are working…
We’ve seen this play out firsthand with our Growth Investor stocks, too, as our High-Growth Investments Buy List soared 6.56% higher in April, thanks in part to positive quarterly results.
So far, this earnings season, we’ve had 29 Buy List companies post results, with 19 beating earnings estimates and only seven missing analysts’ forecasts. Our average earnings surprise is 18%.
And I suspect that wave after wave of positive results will continue to drive our Growth Investor stocks higher in the upcoming weeks.
Congrats to all the Growth Investor subscribers out there navigating this complex market. If you haven’t checked the portfolio recently, click here to sign in. And if you’d like to learn about joining Louis in Growth Investor, click here.
