This Week in Review | Fed Independence, US Inflation, Q4 Bank Earnings

Transcript

Ben Thistlethwaite:

Hello, and welcome to This Week in Review. This is a weekly segment that's designed to highlight a few important developments that you might have missed this week. We'll talk about what they mean for markets, and most importantly, the potential impact for investors. To stay up to date with all of our latest market insights, please subscribe to our YouTube channel or visit FisherInvestments.com Now, let's review what happened this week.

First, Fed independence concerns.

 Last week, the US Department of Justice, or DoJ, announced a criminal investigation into potential misrepresentations in Fed Chair Powell's June congressional testimony. On Sunday, Powell pointedly defended his past actions as Fed chair and alleged the Trump administration's threat of criminal prosecution was an attempt to pressure the Fed into lowering interest rates. This development likely sparks ongoing legal battles between the Trump Administration and potentially the Fed itself. Broadly speaking, we think the fear around Fed independence is misplaced, though. The Fed has never been completely free of politics, and even the appearance of being concerned about independence is a political act itself.

Here's what's really important, though, considering President Trump's history of public disagreements with Powell, little, if any, of these developments likely surprise markets, which has been largely borne out by the market's lackluster reaction to the news earlier this week. Legally, the president would need to justify firing Powell, and policy disagreements generally don't appear to meet that standard. Now, some may speculate that President Trump may try to leverage the DOJ investigation as a justifiable cause for Powell's firing, or to prevent Powell from staying on as a Fed Governor after his chairmanship ends. Now, that could allow the president to install a new fed chair nominee sooner than May. However, this tactic could get hung up in Congress or the courts. Investors should remember that while the Fed Chair role is important, monetary policy decisions are made collectively by the Federal Open Market Committee. The Fed Chair is just one of a dozen voting members.

This limits the likely impact a new fed chair could have on the trajectory of monetary policy, at least in the near term. Also, although it would be uncommon Powell could remain on the Fed's Board of Governors until 2028, meaning he could continue to have a say in policy. We're continuing to monitor these developments, but we really see monetary policy as just one of many factors influencing markets. And though this latest development has certainly garnered plenty of headlines, we don't believe it's likely to derail markets over the next 12 to 18 months.

Next, US inflation.

On Tuesday, the Bureau of Labor Statistics released the latest US consumer price Index data, or CPI. The CPI report showed that in December, headline inflation remained at 2.7% year-over-year. That's in line with consensus forecasts. This latest inflation reading continues the moderating trend that we've seen in inflation since it peaked at 9.1% year-over-year growth back in June of 2022. Notably, today's headline inflation levels remain just below the long-term annualized average of around 3%. Now, we know rising costs can be incredibly stressful and can cause real hardships for people, but some level of inflation is actually normal and reflects a growing economy. And while some fear that high inflation may return, this seems pretty unlikely to us since global money supply growth remains moderate.

Now remember, inflation is always and everywhere. Too much money chasing too few goods and services. Also important for investors, stocks have historically been a very reliable hedge against inflation, with long-term equity returns averaging annualized returns around 10%. We believe that owning stocks can help offset inflation while increasing the likelihood of reaching your long-term goals.

And finally, Q4 bank earnings.

Q4 earnings season kicked off in earnest this week with several major US financial firms reporting results. Many bank earnings were mixed, with some banks reporting a rise in quarterly profits, while others noted some headwinds. Positively, banks reported tailwinds, including broad consumer and corporate health, and cited benefits from a supportive regulatory environment that helped grow dealmaking volumes, things like mergers, acquisitions and initial public offerings. Concerns hinged on geopolitical tensions and potentially high asset prices.

Now, some investors may wonder how President Trump's proposed one year, 10% ceiling on credit card interest rates might impact bank earnings. But implementing the cap on credit card interest rates would likely require congressional action, and that just seems unlikely to us. In the past, there have been some bipartisan bills intended to address credit card interest rates without really any success. For investors, Bank earnings appear to be perfectly healthy for now, but we'll be keeping a close eye on the situation as it evolves. When we look at overall earnings, they appear strong as well. Analysts expect Q4 blended earnings across all 11 sectors in the market to rise at 8.3% year-over-year on revenue growth of 7.7% year-over-year. If Q4 earnings are positive as forecast, it would mark the 10th consecutive quarter of earnings growth.

Thanks for tuning in to This Week in Review.

If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week. It's released every Monday. You can also visit FisherInvestments.com anytime for our latest thoughts on markets. Thanks again for joining us, and don't forget to hit "Like" and "Subscribe."