Fed to Hold Rates Steady and Brace for Trump

Commodity

Central Bank

Summary:

The Fed´s rate decision will be released at 2 p.m. in Washington on Wednesday and Fed Chair Jerome Powell will hold a post-meeting press conference 30 minutes later.

Federal Reserve officials are expected to leave interest rates steady this week, giving themselves more time to lower inflation, the break in rate cuts would come after three straight reductions since September that lowered the Fed’s benchmark rate by a full percentage point. Their target range is now 4.25% to 4.5%.

Several policymakers have said they expect fewer rate reductions this year following data showing the US economy is on sturdy ground and that inflation has been stickier than anticipated. December data for the Fed’s preferred inflation gauge, the personal consumption expenditures price index, is due Friday.

Still, after a string of surprising data and uncertainty over how the US economy might respond to an array of bold new policies from Trump on trade, taxation, immigration and regulation, officials are unlikely to commit to any particular rate path.

“They’re skipping a rate cut,” said Gregory Daco, chief economist for EY. “But they want to retain as much optionality as possible to adjust the fed funds rate further through the year.”

The Fed’s rate decision will be released at 2 p.m. in Washington on Wednesday and Fed Chair Jerome Powell will hold a post-meeting press conference 30 minutes later. Fed to Hold Rates Steady and Brace for Trump_1

Fed to Hold Rates Steady and Brace for Trump_1

Future Adjustments

Fed watchers don’t expect the Federal Open Market Committee to make many changes to their post-meeting statement. The current wording referring to the “extent and timing of additional adjustments” already gives policymakers flexibility to change their approach, as needed, based on what happens with the economy, said Daco.

Powell will almost certainly be pressed by reporters over how he and his colleagues are factoring Trump’s policies and proposed plans into their outlooks for the economy. Fed officials are not due to release updated forecasts until their March policy meeting.

But minutes from the December gathering showed “a number” of participants included placeholder assumptions about Trump’s potential plans in their economic projections and “almost all participants” said the upside risks to inflation had increased.

According to Daco, investors also want to hear more from Powell on the so-called “neutral rate,” or the level at which the Fed is neither juicing nor cooling the economy. Officials have been raising their estimates for neutral over the past year. If many policymakers believe interest rates are near that point, it suggests not only a slower pace of reductions ahead, but fewer total cuts as well.

Reporters will likely ask the Fed chief for more clarity on what officials will need to see before they lower rates again, and, conversely, what could force them to consider a rate increase. After a blockbuster December jobs report, economists at Bank of America Corp. said they believed the central bank’s next move might be a hike.

Such worries eased, however, after a key gauge of consumer prices — which excludes food and energy — rose by less than expected in December, marking the first step down in six months. Policymakers welcomed the report but said they still have more work to do to get inflation down to their 2% target.

Political Pressure

Powell may also be asked to respond to Trump’s latest jabs at the central bank.

“I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision,” Trump said Jan. 23, in an apparent reference to Powell.

Powell has in the past deflected or ignored Trump’s comments on monetary policy but the remarks, coming in Trump’s first week back in office, suggest the Fed chief could face more pressure than ever before from the new administration.

“The Fed will likely have to deal with Trump’s efforts to influence monetary policy, both through appointments and potentially through other efforts to exert more sway on the institution,” Michael Feroli, chief US economist for JPMorgan Chase & Co., wrote in an email note Friday. He predicted this week’s meeting will be “a boring start to a tumultuous year for the Fed.”

Source: Bloomberg

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Stocks

Economic

The Largest One-Day Market Cap Loss in U.S. History

Nvidia’s dramatic stock plunge marks the largest single-day market value loss ever recorded in U.S. history, surpassing all previous declines by a wide margin. The company’s shares fell 17%, erasing $600 billion in market capitalization and dragging the Nasdaq index down by 3.1%. This sharp downturn occurred mere days after Nvidia overtook Apple to become the world’s most valuable company.

The impact extended beyond Nvidia, with shares of other semiconductor and data center firms such as Broadcom, Dell, and Oracle also taking heavy hits. Broadcom’s stock fell 17%, erasing $200 billion in market value, while Dell and Hewlett Packard Enterprise saw declines of 5.8% or more.

DeepSeek: A Major Competitive Threat

The selloff was largely driven by the rise of DeepSeek, a Chinese tech company whose AI advancements are challenging Nvidia’s dominance. DeepSeek recently unveiled its R1 model, an open-source AI system that has reportedly outperformed OpenAI in several benchmarks. Its mobile application, powered by advanced AI, has quickly become the most downloaded productivity app on both the Apple App Store and Google Play in the U.S.

What makes DeepSeek particularly disruptive is its cost efficiency. Its first AI language model, launched in late December 2024, was developed for less than $6 million and used Nvidia’s H800 chips—lower-performance versions designed to navigate export restrictions. This highlights DeepSeek’s ability to deliver cutting-edge AI solutions at a fraction of the cost typically required by Silicon Valley firms.

Market Sensitivity to GPU Demand

Nvidia’s dominance in the AI chip market has been built on its GPUs, which are widely used by tech giants like Alphabet, Meta, and Amazon for training and running AI models. However, analysts at Cantor raised concerns that DeepSeek’s technology could signal a peak in GPU demand. Although they acknowledged that AI advancements would likely drive long-term growth in computational needs, the immediate market reaction reflected heightened sensitivity to any indication of reduced spending on GPUs.

The concerns are compounded by Nvidia’s soaring stock performance in recent years, with gains of 239% in 2023 and 171% in 2024. This meteoric rise left the market highly reactive to any potential shifts in demand, as evidenced by the sharp selloff.

Wider Implications for Silicon Valley

The ripple effects of Nvidia’s downturn were felt across Silicon Valley, particularly among companies heavily reliant on Nvidia’s GPUs. Firms like Super Micro Computer and Oracle saw significant losses, with the latter dropping 14% despite being part of a new AI initiative under President Donald Trump.

For Nvidia CEO Jensen Huang, the fallout was equally severe. His net worth plunged by $21 billion, dropping him to 17th place on Forbes’ list of the world’s richest individuals. Nvidia’s loss also dwarfed the market capitalizations of major companies like Coca-Cola and Chevron, underscoring the magnitude of the selloff.

DeepSeek’s Role in Reshaping the AI Landscape

DeepSeek’s emergence highlights a shift in the AI landscape, where cost-effective innovations are beginning to challenge established leaders. Its rapid success with the R1 model and integration of AI into widely accessible applications suggest a democratization of AI technology.

This development could force Nvidia and other industry leaders to rethink their strategies, focusing on cost efficiency and adaptability in the face of rising competition. The competition from DeepSeek also underscores the growing global nature of AI innovation, with China positioning itself as a formidable player in the field.

A Wake-Up Call for Silicon Valley

Nvidia’s $600 billion market cap loss serves as a stark reminder of the volatility and competition in the tech industry. While Nvidia remains a leader in AI and GPU technology, the emergence of challengers like DeepSeek signals a more competitive and cost-conscious future for the sector.

As the market adjusts to these new dynamics, the focus will likely shift to how companies adapt to evolving demand, maintain their competitive edge, and navigate the growing influence of global competitors in the AI space. Nvidia’s historic loss may ultimately catalyze a period of introspection and innovation across Silicon Valley.

Source: CNBC

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Manuel

Cryptocurrency

Bitcoin (BTC) is gradually returning to whale wallets following the latest market downturn and liquidations. The most recent rounds of accumulation happen at a time when BTC is once again sliding and threatening to break below $100,000. BTC traded at $101,180.00 following the most recent market correction.

Recently, over 20K BTC flowed back into whale addresses, especially known wallets associated with accumulation. Based on Cryptoquant data, the accumulation is spread across several days, suggesting a gradual buying plan. Accumulation addresses are those that have received two consecutive inflow transactions that are not dust and have not spent their reserves. Inflows into those addresses are now more significant on a daily basis, with the occasional peak day of buying. Whales are Accumulating and Most are bringing Bitcoin to the USA_1

Whales are Accumulating and Most are bringing Bitcoin to the USA_1

The recent sideways movement of BTC around $100,000 is creating similar conditions to the summer of 2024 when whales could shake down panicking traders for months. This time around, accumulation is more active, with almost daily inflows into accumulation addresses.

In total, accumulation addresses carry more than $2.7B. The address metric may be inexact, as it would count both miners, whales, and retail. However, the trend has become more significant lately, reflecting the growing demand for owning and controlling BTC in a self-custodial wallet.

The most rapid expansion is observed in wallets holding over 100 BTC, with nearly 2,000 new addresses in January. At the same time, the holdings of whales with over 10,000 BTC are gradually decreasing, or moving to smaller wallets.

For now, the market has not seen capitulation or a deeper drawdown, but whales are still buying during favorable days of lower prices. The recent volatility ahead of the monthly futures expiration event brings additional buying opportunities. The accumulation behavior coincides with the Rainbow chart stage, which suggests the BTC rally is not yet over.

Bitcoin buyers are also ‘Made in USA’

The most recent accumulation reflects the crypto optimism in the USA. More significant capital available, along with expectations of an ongoing bull market, are turning BTC into a US-owned coin. The trend extends the inflow of funds into ‘Made in USA’ crypto, which is now valued at over $529B in total market capitalization.

The ownership ratio of the USA to the rest of the world is at the highest level since before the 2022 market crash. Currently, the ratio stands at 1.61, compared to a total peak in 2022 at 1.86, when the metric started getting tracked.

US buyers became more active in the last quarter of 2024, extending the trend into the new year. | Source: Cryptoquant

The high accumulation for US-based investors tracks the general trend of peak trading during US market hours. A high level of the metric has correlated with previous bull markets, where BTC was becoming inaccessible, except for those with sufficient liquidity.

Fiatleak shows the retail side of US-based demand, with constant inflows from dollar-based buying. However, the real driver of demand includes the daily ETF buying, as well as the building of corporate treasuries.

The talk of a government strategic reserve also boosts confidence in BTC for US investors. The US Government is also still holding, with over $20B in BTC, despite talks of selling all holdings. US-based demand has also been reflected by Bitcoin nodes, where over 26% of all node operators are in the USA, with both personal nodes and cloud-based data centers.

The buying happens at a time when the US dollar is also one of the key pairs for BTC. More than 25% of all BTC trading is in direct pairings with the US dollar, showing robust activity on centralized exchanges.

Source: Cryptopolitan

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Stocks

Chinese startup DeepSeek’s super-efficient open-source AI model may have sunk some of Wall Street’s favorite AI stocks on Monday, but it may have also crowned some new favorites.

Yesterday was the worst day for Nvidia (NVDA) and the Philadelphia Semiconductor Index (SOX) since March 2020. Yet some tech sector stocks have soared—Salesforce (CRM) stock has risen 8% this week and Apple (AAPL) has climbed 7%.

That’s because the AI trade has, up to now, been driven by the suppliers of the “picks and shovels” of artificial intelligence: semiconductors, networking equipment, and electricity. But DeepSeek’s success suggests AI’s picks and shovels may not need to be as plentiful or as fancy as investors once thought. That could be a boon to AI buyers, like software companies, who pay cloud service providers and AI companies for access to foundational models and computing power.

Could DeepSeek Hasten the Rise of AI Agents?

Several analysts predicted at the end of last year that AI agents—digital assistants capable of performing more tasks than AI chatbots—would draw more interest from investors.

Major tech companies and upstarts have already begun rolling out AI agents that have the potential to reshape consumer behavior, and Wall Street has taken notice. OpenAI last week launched its AI agent, Operator, which the company said could order users' groceries or book their plane tickets. Salesforce’s Agentforce saw “healthy early interest” in its first months, according to Bank of America analysts. And shares of med-tech company Tempus AI (TEM) soared last week after it released olivia, its AI-power health concierge.

The pivot from infrastructure to application may have been hastened by DeepSeek’s model, the cost-efficiency of which can likely be replicated by U.S. companies.

“We believe that DeepSeek’s innovations at the model layer reinforce our thesis that the Application and Platform layers are set to benefit as revenue moves from the Infrastructure layer and enterprises allocate more budget to AI,” wrote Goldman Sachs analysts in a note on Tuesday. Lower computing costs, they say, “should help catalyze broader usage of AI workloads and encourage adoption across businesses and consumers.”

Enterprise Software Could Benefit from DeepSeek Ripple Effect

Goldman expects the benefits of lower computing costs to accrue first to major software companies with established AI products, including Microsoft (MSFT), Salesforce and Adobe (ADBE). But, they say, more efficient models should lower the barrier to entry for smaller competitors and encourage the proliferation of AI use cases.

Morgan Stanley analysts agreed that enterprise software companies were most likely to benefit from the savings that should follow from America's DeepSeek reckoning. "More cost-efficient models are bringing down ‘GenAI input costs’ for the broader Software ecosystem," the analysts wrote. They highlighted Microsoft as a major beneficiary, noting its Azure platform is an optimal location for application developers to access and build on foundational AI models.

Source: Investopedia

Risk Warnings and Disclaimers

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Stocks

Economic

A Surge in Capital Outflows from Emerging Markets

JPMorgan has raised concerns about the "sudden stop" in capital flows to emerging markets, excluding China, as global investors withdraw funds in response to robust U.S. economic growth and policy shifts. In Q4 2024, these economies witnessed a net outflow of $19 billion, with another $10 billion expected to leave in early 2025. The ongoing outflows highlight a significant challenge for developing economies, which rely heavily on foreign capital to sustain growth and financial stability.

The trend is not driven by specific crises in emerging markets but is instead a reflection of tightened global financial conditions. President Donald Trump’s "America First" policies, including aggressive tax reforms and economic incentives, have bolstered the U.S. economy, attracting capital at the expense of developing nations.

The Role of U.S. Policy in Shaping Capital Flows

President Trump’s policies, particularly tax cuts and domestic investment incentives, have made the U.S. an increasingly attractive destination for global investors. This environment has elevated expectations that U.S. interest rates will remain high for an extended period, further amplifying the pull of capital away from emerging markets.

Unlike past crises in emerging markets—such as the Asian financial crisis of 1998 or the taper tantrum of 2013—this phenomenon is not tied to localized economic vulnerabilities. Instead, JPMorgan attributes the outflows to strong U.S. growth and policy-induced risks, which are reshaping global investment patterns.

Resilience and Vulnerabilities in Emerging Markets

Despite the challenges posed by capital flight, most emerging economies remain resilient, with sufficient buffers to withstand the shock. However, JPMorgan has identified several countries that are particularly vulnerable to these outflows. Romania, Malaysia, South Africa, and Hungary are among the nations at greater risk, given their reliance on foreign investment to balance external accounts and maintain currency stability.

These economies may face increased borrowing costs, currency depreciation, and heightened fiscal pressures if the trend continues. Nonetheless, JPMorgan notes that the overall situation is not as dire as previous episodes of capital flight, given the relative stability in global markets and the absence of a systemic crisis.

The Outlook for Capital Flows

The trajectory of capital flows will largely depend on U.S. economic indicators and monetary policy decisions by the Federal Reserve. Key data on employment, inflation, and retail sales will play a critical role in shaping investor sentiment and influencing interest rate expectations.

Should U.S. economic data remain robust, the Fed is likely to maintain higher interest rates, further reinforcing the capital flight trend. Conversely, any signs of economic weakness in the U.S. could ease pressure on emerging markets, as global investors seek alternative opportunities.

Navigating a Shifting Landscape

The ongoing capital outflows from emerging markets underscore the broader impact of U.S. economic policies on global financial dynamics. While many developing economies possess the resilience to weather this shift, countries with higher vulnerabilities may face significant economic pressures.

JPMorgan’s warning serves as a reminder of the interconnected nature of global markets, where policy decisions in one region can ripple across others. For emerging markets, adapting to this changing landscape will require robust fiscal management, diversified funding sources, and strategic measures to maintain investor confidence amidst external uncertainties.

Source: JPMorgan

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Economic

Political

Federal funding pause threatens more than $1 trillion that flows to states, cities and other local governments, putting everything from transit infrastructure to housing projects at risk.

Trump’s acting budget director issued a memo directing all agencies to temporarily halt federal financial assistance while the government reviews if the spending complies with an onslaught of recent executive orders. The pause was expected to take effect on Tuesday at 5 p.m. Eastern Time, although a federal judge in Washington temporarily blocked the directive.

Freezing payments would be an unprecedented step and likely ripple across the country because states, cities and jurisdictions such as school districts rely on the federal government for significant amounts of cash.

“A review of spending is fine, but a blanket pause in spending is just grossly irresponsible and has real consequences for people,” said Allison Russo, a Ohio state Democratic representative, in a post on X. She estimates the state receives nearly 30% of its operating budget from Washington.

The memo filed late Monday is a striking missive by the White House sent panic through city halls, statehouses and congressional offices. In the directive, agencies were instructed to “pause all activities related to obligation or disbursement of all Federal financial assistance” though the order doesn’t impact Social Security and Medicare benefits.

US Senate Appropriations Committee Vice Chair Patty Murray and House Appropriations Committee Ranking Member Rosa DeLauro said the scope of the order is “breathtaking, unprecedented, and will have devastating consequences,” according to a Jan. 27 letter the lawmakers sent to the Office of Management and Budget. The lawmakers, both Democrats, said the move has sown confusion across the country.

In 2023, federal grants to state and local governments totaled $1.1 trillion, or 18% of all DC outlays, according to an April report from the Peter G. Peterson Foundation, a research group founded by the former US Secretary of Commerce and Blackstone Inc. co-founder. And over the last four decades, such grants to states and local governments accounted for roughly 17% of their total revenues.

New York to San Francisco

The impact could be widespread. New York City anticipates receiving $9.6 billion in federal grants in the 2025 fiscal year which ends on July 1, according to Comptroller Brad Lander.

“President Trump’s illegal order to freeze hundreds of billions of dollars that Americans rely on risks throwing cities, states, and families across the country into chaos,” Lander said in a statement.

There isn’t a standard formula for how municipalities get their funding and some local agencies would be impacted more than others. New York City’s Administration for Children’s Services, which runs the city’s child welfare programs, receives 50% of its overall budget from federal funds, while almost one-quarter of the city’s Department of Emergency Management is federally financed, Lander’s office said.

In San Francisco, about 11% of the city’s $15.9 billion budget comes from federal funding, including both direct allocations from Washington and funds passed through the state. Similarly, in Texas, Dallas County Judge Clay Jenkins highlighted that health and transportation departments rely heavily on federal dollars.

Legal Pushback

This isn’t the first time Trump has used the federal purse-strings to forward his policy agenda.

Shortly after taking office in 2017, Trump released a budget that would have slashed $190 million in federal aid for anti-terrorism and homeland security grants used by the New York Police Department, but Congress largely failed to approve those cuts.

In 2020, he threatened to strip federal aid to what he called “anarchist jurisdictions” like New York and other Democratic-controlled cities where racial justice protests proliferated in the wake of the murder of George Floyd. Several courts had also blocked his first administration from withholding federal funds to so-called sanctuary cities, though the Justice Department had some success limiting the reach of those court orders.

The pause is already getting challenged in court. The National Council of Nonprofits and the American Public Health Association are among those that filed a suit on Tuesday seeking to block the fund freeze until the court can evaluate what they called the “illegality of OMB’s actions.”

OMB’s plan “will have a devastating impact on hundreds of thousands of grant recipients who depend on the inflow of grant money (money already obligated and already awarded) to fulfill their missions, pay their employees, pay their rent—and, indeed, improve the day-to-day lives of the many people they work so hard to serve,” according to a copy of the suit filed in federal court in Washington.

More lawsuits are expected. New York Attorney General Letitia James said in a post on X that her office is planning “imminent legal action” against what she called the “unconstitutional pause,” and her Connecticut counterpart William Tong derided the Trump administration’s “devastating memo.”

Source: Reuters

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Economic

Political

New mixed messages this week about President Donald Trump's implementation of tariffs are flummoxing markets and businesses hoping for quick clarity on the 2.0 version of Trump's trade policy.

The main point of confusion is that public signals from Trump’s orbit often appear at odds with Trump himself.

The sometimes contradictory back and forth — a feature of the debate around tariffs since Trump's win — is taking on an outsized importance with the approach of Trump’s self-imposed Feb. 1 deadline, where he has promised to install 25% tariffs on Canada and Mexico and 10% duties on China.

Market observers are keenly trying to guess what will actually be installed, especially after an abbreviated weekend trade fight with Colombia that showed Trump willing to move quickly on tariffs but also willing to reverse course when the country backed down to his satisfaction.

This uncertainty will be on center stage Wednesday when commerce secretary nominee Howard Lutnick sits for his confirmation hearing.

Lutnick's comments on trade will be closely watched after Trump announced him as the leader of "our Tariff and Trade agenda."

Promises of tariffs that will be 'enough to protect our country'

The latest back and forth came in rapid succession on Monday following a Financial Times report that newly confirmed Treasury Secretary Scott Bessent is pushing a plan that would see Trump's plan for coming universal tariffs start at a lower level of 2.5% and then rise gradually.

Intentional or not, the report was taken as a clear and welcome signal to the markets, as gradual tariffs would allow businesses and supply chains to adjust even if the end result is the same.

But — as he has in the face of different apparent trial balloons in the past — Trump himself immediately poured cold water on the idea in favor of promising a maximalist approach.

Asked by reporters aboard Air Force One Monday night about the report, Trump denied it, said he wanted a rate "much bigger" than 2.5%, and even said he didn't think Bessent would be behind such an idea.

The coming rate, Trump added, "will be enough to protect our country."

The close focus on these signals from the new administration comes as business leaders try to plan and — in at least some cases — moderate Trump's plans.

"We've done a lot of scenario planning," said General Motors (GM) chair and CEO Mary Barra in a Yahoo Finance live interview Tuesday, adding that she has spoken to Trump on the issue and that she is confident the president "very much understands exactly what the ramifications will be."

Economists have been closely monitoring the situation, with a new Oxford Economics report this week considering the macroeconomic effect if Trump follows through on tariffs on our immediate neighbors.

"A trade war with Mexico and Canada is a key risk to the outlook," wrote Matthew Martin, a senior US economist. "We simulated a large tariff increase on Canada and Mexico and it would cause a big hit to the US economy," he added.

Other studies have found that the effects on Mexico and Canada could be deeper and an all-out trade war would likely be enough to push those countries into a recession.

A repeating pattern

This week's pattern was clearly reminiscent of an episode earlier this month after a Washington Post report floated the idea of Trump's aides (including Bessent) looking to place limits on his blanket tariff promises with some goods exempted.

Trump quickly stepped in — then as now — to deny that any limits were in the offing. The story "incorrectly states that my tariff policy will be pared back. That is wrong," he wrote at the time.

And earlier in the day Monday, Trump reiterated his tariff rhetoric in an appearance before House Republicans.

"We are going to immediately install massive tariffs," he told the crowd of countries that don't accede to his wishes, promising the duties would bring in trillions of dollars in revenue.

In the speech, Trump also made clear he plans to place duties on foreign goods like computer chips, semiconductors, pharmaceuticals, steel, and more in the "very near future" to return production of those goods to the US.

Meanwhile, close trade observers have been reading the signals in multiple ways as part of a lively ongoing debate around Trump.

"One theory," noted William Reinsch of the Center for Strategic and International Studies in a recent interview, is that the president's advisers think these trial balloons are "the best way to get his attention, rather than submitting a memo that he probably won't read."

He added some advice for the markets to "take a step back and wait for the dust to settle" but quickly noted that "nobody does that." - Ben Werschkul is Washington correspondent for Yahoo Finance.

Every Friday, Yahoo Finance's Rick Newman and Ben Werschkul bring you a unique look at how US policy and government affects your bottom line on Capitol Gains. Watch or listen to Capitol Gains on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.