RJ Hamster
Must Read: Don’t Let a Divided Federal Reserve Distract…
Don’t Let a Divided Federal Reserve Distract You From the Next Wave of AI
“I won’t see you next time.”
That’s how Jerome Powell concluded the press conference after his final Federal Open Market Committee meeting as Federal Reserve Chair on Wednesday.
It sounded like a clean goodbye.
But like a lot of things around the Fed these days, the reality is a little more complicated.
Powell’s final meeting as Fed Chair ended with no rate cut, no clear consensus and no easy answers.
Right now, the Fed is more divided than it has been in decades. Inflation is still sticky. Energy prices are muddying the picture. And even though rate cuts may be coming, nobody seems to agree on how soon they should begin.
As for Powell, his term as Fed Chair ends on May 15. Kevin Warsh is moving closer to taking over the gavel after the Justice Department dropped its criminal investigation into Powell and the Senate Banking Committee advanced Warsh’s nomination. A vote is expected soon.
But Powell has also said he plans to remain on the Fed Board after his Chair term ends. So, Warsh may take over as Chair while Powell remains in the room.
That is unusual. Most modern Fed Chairs have left once they handed over the gavel. I’ll have more to say about this changing of the guard next week, but in today’s Market 360, I want to focus on what happened at the latest meeting, what the latest inflation data tells us about future rate cuts – and why the bigger opportunity may have nothing to do with the Fed at all.
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A New Fed Regime Is Coming
On Wednesday, the Fed held its benchmark interest rate steady at 3.5% to 3.75%. That marks the third-straight meeting where the central bank decided to sit tight.
Fed Governor Stephen Miran wanted to cut rates immediately. But three Fed hawks supported holding rates steady and did not want to telegraph future cuts. In plain English, one group wants to start easing now, while another group does not want Wall Street assuming rate cuts are guaranteed.
I understand why the Fed is hesitant. Cut too soon, and it risks feeding inflation. Wait too long, and it risks choking off growth. That is the box Powell has been in for months.
But I think what they’re missing is the fact that a lot of the inflation we are dealing with right now is energy-related, which was evident in this morning’s Personal Consumption Expenditures (PCE) reading.
Core PCE rose 0.3% in March, pushing the annual rate to 3.2% – its highest level since November 2023. Headline PCE rose 0.7% for the month and 3.5% over the past year, as oil prices pushed consumers’ costs higher.
The good news: These numbers matched expectations, so this was not an inflation shock.
The bad news: Inflation is still too hot for the Fed to declare victory.
Personally, I do think rate cuts are coming, because the reality is that the Fed cannot control energy prices. But if the conflict in the Middle East can wrap up soon, then energy prices should cool, and inflation could start looking better quickly.
And if inflation looks better, the new Fed regime will have more cover to cut.
Warsh Could Bring a Different Fed
What people need to understand is Kevin Warsh is not some unknown. He was at the Fed during the 2008 financial crisis, so he knows what it means to act when markets are under stress.
But he also has a different view of monetary policy than Powell. We’ll get into that more next week. For now, I would just say that a Warsh-led Fed is much more likely to act quickly on interest rates, especially if inflation cools and energy prices stop pressuring the data.
Lower rates make it cheaper for companies to borrow and expand. They also tend to push investors back toward stocks, especially growth stocks.
But I do not want you to make the mistake of thinking rate cuts solve everything.
There is still risk in the bond market. If bond vigilantes keep pushing long-term yields higher, investors can collect a nice yield but still watch their principal erode. That is a problem Treasury Secretary Scott Bessent will have to deal with.
Don’t Wait on the Fed
So, the biggest fortunes aren’t made by waiting for the Fed to give the all-clear. They are made by getting positioned before the next great market reset becomes obvious to everyone else.
And right now, I believe that reset is happening in AI.
The first phase of the AI boom was about chatbots, graphics chips and data centers. It produced some incredible winners.
But the next phase could be much bigger. It will be the phase where you’ll hear about things like scientific AI breakthroughs, AI agents, national-security AI infrastructure, quantum computing, nuclear fusion, and more.
That is why I recently sat down for an urgent presentation about what I call the AI Reset.
When a reset that big happens, the old winners do not always remain winners.
And in my special presentation, I explain why some of today’s most popular AI stocks could be vulnerable… which new class of AI stocks I believe could benefit as this technology comes online… and the AI stocks I believe investors should buy – and avoid – before this reset hits.
Sincerely,
Louis Navellier
Editor, Market 360
