Fed holds rates steady amid tariff and Middle East tensions, Trump mulls bunker busters

• JJ holds rates steady – Which should not be a surprise.
• Cites the risk of inflation due to the unknown results of tariffs.
• Israel continues to pummel Iran, The Ayatollah pledges to eliminate that nation.
• Trump considers the ‘bunker busters’ while leaving the door open to negotiate.
• Oil up, gold down, Bonds Flat.
• Try the Pasta Norma.

JJ leaves rates unchanged – which should have surprised no one, leaving some to ask why?

Stocks closed mixed as concerns over ‘what’s next’ from the FED filled some investors with angst while others stayed focused on the long game. The Dow lost 44 pts, the S&P lost 2, the Nasdaq gained 25, the Russel up 12, the Transports up 36, the Equal Weighted S&P up 3 while the Mag 7 gained 25 pts.

Fed Chair JJ Powell took to the stage at 2:30 pm – this after the headlines told us that they decided to do nothing (again)…. keeping rates at 4.25%-4.5% - JJ warning us that ‘tariff driven economic uncertainty and inflation risks’ continue to complicate the narrative…. Now – let’s be honest – who really expected them to do anything? It was well telegraphed that they were NOT going to cut (or raise) rates – so why was anyone surprised? Or was it not a surprise, but more frustration?

Journalists in the room – appeared frustrated with Fed Chair Powell’s decision to keep interest rates at what they describe as ‘high’ despite declining inflation data, with some specific questions challenging the Fed’s data-dependent approach. Meaning – the data suggests that inflation is waning….so why isn’t the FED cutting? To which he had a response saying that

“Ultimately the cost of the tariffs has to be paid and some of it will fall on the end of the consumer, we know this because that’s what businesses say, that’s what the data says from the past”.

And so, you see – it is about the data! Ultimately – his decision to hold rates steady underscores the ‘delicate balance’ facing the FOMC…. lower inflation – but the potential for it to rise in the months ahead. In the end though, the Dot Plot continues to pencil in 2 rate cuts this year – even though 7 of the 19 members penciled in NO rate cuts for you, 2 penciled in 1 cut while 10 penciled in 2 cuts. (think majority rule) And while they are telling us that we can expect 2 rate cuts – they also downgraded economic growth for this year while raising forecasts for unemployment and inflation. Talk about getting caught between a ‘rock and a hard place’!

As you can imagine – Trump has plenty to say about JJ and the Fed’s decision to stay the course. In the end, it is what it is, and I remain in the camp that we are not getting any cuts this year UNLESS the hard data gets weaker, which it currently is not.

Now some are pointing to how housing is under pressure – thus the FED should cut rates to support the housing market – and to that I would say – that is exactly what they should NOT do…..Housing prices NEED to adjust, they need to come in a bit and the only way to do that is for rates to remain here….because that will force sellers to cut prices to make the sale. And btw – we are starting to see housing prices decline in parts of the country – so it is working.

If the FED cuts rates and mortgage rates drop – why does anyone think that housing prices are going to fall? Lower rates will bring out more buyers not sellers. Higher rates will cause sellers to come to the market and cut prices to make the sale and that will also cause buyers to come to the market. Lower rates will support higher prices and that is NOT what we need right now. We need housing to come in, because the 15 yrs of zero rates and 2.75% mortgages are what caused housing prices to surge…. That was NOT normal….so stop the histrionics…..6.8% mortgage rates are not usurious – just ask any baby boomer that paid 18% in 1980, 16% in 1982, 13% in 1984, 10% in 1986…..

Now let’s not forget what else is top of mind for investors…..Does the middle east mean anything to you? Tensions are high – let’s not kid ourselves……Iran has almost been neutralized, Israel has taken control of the skies and is committed to taking out the ‘hidden’ nuclear plants that exist deep in the mountains and in fact last night they struck those nuclear sites again while teasing that the Ayatollah was next in line to ‘meet his maker’ – all as Trump considers US options (if any…) of how to help Israel finish the job.

Look, we are the only ones with ‘bunker buster’ bombs, bombs that can tunnel 200 ft into the earth – and that is what has to happen in order to bring Iran to their knees. The question now, will we or won’t we? Trump has called for the complete surrender of Iran and the Ayatollah said that was ‘threatening and ridiculous’ The Ayatollah calls for the elimination of Israel and Death to America – and that is NOT threatening and ridiculous? He’s been doing so for 50 yrs… what happens next, is not clear….. Last night Trump said that he will make the final decision within the next two weeks – as he tries once again to give diplomacy a chance to resolve the ongoing tensions, prioritizing negotiation over conflict.

At the moment we are all in a ‘wait and see’ mode, wait and see what the FED does next, wait and see what Israel does next and wait and see what we do next.

Eco data today includes the Philly Fed Business Outlook and the leading index, both expected to be slightly negative, but a big improvement over last month’s more negative read. Neither one is considered a market mover by any stretch of the imagination, so you shouldn’t either.

Oil continues to move up – trading as high as $77 overnight but has backed off a bit after the WH eased back on the idea that we were about to drop the bomb. This morning, WTI is trading at $75.60 and is now up 18% since this all began. Now, if Iran chooses to turn up the heat and continue to attack Israel street analysts say that we could see oil surging to $130/barrel and if that happens, you can bet that global central banks would put the brakes on any further policy easing.

Gold – On Tuesday I said that I thought it would remain in the $3400/$3500 trading range until the conflict settles down….and that appears NOT to be the case….Gold was down $50 overnight - trading as low as $3,350/oz – Bloomberg tells us that is because tensions are easing in the mid-east, I say where? I think – you could credit the move in gold to some profit taking - I mean it is up 48% in two years. The idea that tensions are easing - seems tone deaf while the idea that the FED is concerned about the risk of inflation rising would support buying gold not selling it. In any event – it is what it is – Trendline support is 3340.

Bonds traded flat on Wednesday – the TLT up 0.2% and the TLH + 0.1% - leaving rates unchanged – this morning bonds are quiet.

US futures are down slightly…. Dow futures are -100, S&P’s -16, the Nasdaq -65 while the Russell is flat.

European markets are up slightly as they try to shake off the conflict in the Middle East. UK retail sales fell by 2.7% - which was the steepest drop since December 2023. The drop being attributed to higher inflation, higher energy bills and the potential for higher taxes if Rachel Reeves, Chancellor of the Exchequer is to meet her fiscal goals.

The S&P closed at 5980 – down 2 pts…. we remain stuck in this very tight range – 5980/6050…..…. Trendline support is way down at 5812 – a level we could test if the situation remains hot… Let’s see what happens today – it is Friday, and a lot can happen over the weekend…. Understand that there is a significant risk of the market gapping up or down on Monday based on what happens this weekend. My sense is that a gap lower is an opportunity for the long-term investor, while a gap higher supports staying the course.

Remember – political chaos causes short-term angst – causing some to run for the hills while others choose to take advantage of the moves. A decline in prices due to geo-political anxiety is an opportunity, mostly because it is emotional. For now, markets will remain mostly on edge until they lower the temperature in the region – something I do not think happens until Iran is completely neutralized.

Pasta Norma – a Sicilian favorite

Rigatoni with Eggplant and Ricotta Salata - This is a staple Sicilian dish (region of Catania) that is also known by another name: Pasta Norma. Gets its name from the classic Vincenzo Bellini Opera - Norma. Theater director - Nino Martoglio - honored this dish by calling it Pasta Norma as a way to express the perfection he found in both the dish and the opera.

Simple to make and pleasing to the palate......Dress the outdoor table with fresh linens and colorful dishware.... Add some candles, soft music, fresh Italian bread and a nice Chianti and enjoy this meal as the sun sets.... Create the mood......Live the dream....

You need: Rigatoni Pasta, Eggplant, Ricotta Salata, cherry tomatoes, onion, olive oil, fresh basil, garlic, fresh Mozz and s&p.

Bring a pot of salt water to a rolling boil.

Cut up the eggplant into cubes - leaving the skin on. Place in a colander sprinkle salt and let sit for 30 mins...or so........this will draw out excess water and make the eggplant sweeter.

Heat the oil, add the garlic and sliced onion - sauté until soft and golden.... Now add the eggplant and stir.... about 5 mins or so.... Now add a can of cherry tomatoes to their juice. Season with s&p....turn heat to simmer, cover and cook for 20 mins or so.....stirring occasionally.

Now cook the Rigatoni until aldente.... strain (reserving a mugful of water) ... Add the Rigatoni to the sauté pan and stir – now add in a ladle of the pasta water (Tears of the Gods) add fresh basil and the grated ricotta salata. You can also add some of the fresh cubed Mozz if you prefer.... never hurts.

Serve immediately in warm bowls and top with a bit of the remaining sauce - have grated Parmegiana on the table for your guests.