Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, May 9th, 2025. I'm Brian Pietrangelo and welcome to the podcast.
I was on the road this past week and had the opportunity to meet with a lot of clients in the Buffalo and Rochester, New York areas. Really great to meet a lot of new people and an engaging conversation. I want to thank the market leaders in, respectively, Buffalo with Tim Pelcher for Key Private Client and Kevin Schunck for Rochester, also for Key Private Client, for hosting those events. What a great opportunity. In addition, I wanted say thanks to our Key Private Bank market leader in Rochester, Vince Lecce for hosting a very special event yesterday on Thursday. What a great opportunity. So if you're listening in from any of those markets and you have any questions or need more information, please reach out to those three individuals and they can certainly try to help you.
With that, I would like to introduce our panel of investing experts, here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Director Of Fixed Income Portfolio Management. As a reminder, a lot of great content is available on key.com/wealthinsights including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's market and economic news, the economic calendar was fairly light, so we only have two updates for you, but we also have two updates on other topics for you during today's podcast. So the first update on economic news was that weekly initial unemployment claims for the week ending May 3rd came in at 228,000. Now we share this with you because last week's increase was a little bit larger than the average, but this week's decrease was about the same as the increase last week. So the reversion back to a more normal number tells us that the unemployment claims continue to remain very stable, at least at this time, that's good for the employment market.
Second, the ISM report on the services industry showed that the services sector had expanded for the 10th consecutive month in April and effectively for the last five years. Actually good expansion in the services economy. So good news there as we continue to see what the differences are between the manufacturing economy which has been weak and the services' economy which has been strong.
Now the two other topics that we're going to discuss on the podcast today certainly the Federal Open Market Committee meeting that occurred on Wednesday of this week and we're gonna get a recap and dive into what that means for the future. And in addition to that we are going to talk a little bit about tariff policy as we go into the weekend with a little bit of the news from President Trump and also the meeting with Scott Bessent with China over in Switzerland. So with that, let's go right to Cindy to get the recap on the Federal Open Market Committee this week.

Cynthia Honcharenko [00:03:17] Thanks, Brian. The Fed announced that it would maintain the federal funds rate at its current target range of four and a quarter percent to four and half percent. They cited ongoing economic uncertainties, particularly those arising from the recent trade policies. The decision to keep rates steady reflects the Fed's cautious approach amid uncertainties related to the economic impact of the recent tariff implementations. And while the economy continues to expand at a somewhat solid pace, the Fed acknowledged that risk to both inflation and employment increased. The labor market remains strong, but the full effects of trade policies are still unfolding. They emphasize the data-dependent approach, indicating that future policy adjustments will be based on incoming economic data and the evolving outlook.
So what does this mean for the Fed's future policy stance? I think there's four things here to look at. Slower path to rate cuts. Powell warned that new tariffs could delay inflation progress and rate cuts up to a year. So even though the Fed had previously projected two cuts by the end of 2025, the trajectory is now less assured. Policy easing will likely be pushed back unless inflation data improves convincingly for them.
Second, rising risk of policy dilemma. Powell acknowledged the possibility of simultaneously higher inflation and rising unemployment, which he called a very difficult scenario for the Fed. This highlights the risk of entering a stagflation-like environment, which could force the Fed to prioritize inflation at the expense of growth or vice versa, depending on which of the risks dominates.
Third, data-dependent, not calendar-driven. Powell reiterated a data-dependent approach, not a timeline-driven one. Investors should not expect pre-committed rate cuts. Instead, the Fed will likely respond to monthly inflation and labor data with the flexibility to pause longer or pivot more quickly depending on the direction of risk.
And finally, policy bias is still toward easing, but with less conviction. The Fed's clearly not considering further rate hikes and the balance sheet runoff reduction is a dovish signal. The Fed next move is still expected to be a cut, but now with greater conditionality. Markets will remain volatile as expectations adjust with each data release.
And what does this mean for investors? I think the bottom line is the Fed stance remains one of cautious optionality. Powell's messaging suggests the bar for rate cuts has risen. In the short term due to inflation concerns from tariffs. While recession risks are not yet acute enough to force any action, investors should remain attentive to the upcoming economic reports and Fed communications for further insights and potential policy shifts. George, Rajeev, what are your takeaways from this week's Fed's meeting at Powell's presser?

George Mateyo [00:06:25] Well, Cindy, I think you nailed it. I think there's just a lot of uncertainty out there. I can't remember a time where the Fed has just been kind of conditioned to do nothing. And unless, of course, the economy is kind of in a steady state, which it really is, but nonetheless, it struck me that this wait and see approach they've opted to take is probably appropriate in the short term, but I think more in the medium term, it has some risk to it. And you pointed out rightly so that they're in a position where they're waiting to see how things play out with respect to inflation and growth.
And my guess is that they might be too late to act. In other words, we might start to see growth split before they act. And that's a little bit different from what we've seen in past crises. Not to say this is a crisis yet, but I think we have to acknowledge the fact that there's just so much uncertainty that we would probably see the Fed act only if there's a significant deterioration in the labor market. And right now there isn't, thankfully so. So more specifically, we saw the the jobless pay numbers that we talked about on these calls come in this week. The fact that they actually kind of think down a little bit from the prior week is probably again further validation for the Fed that they don't have to rush into anything, take any bold moves right now. That's further support for what we saw last week at this time when we talked about the job numbers that came up for the prior month better than expected. So for right now the labor market is holding on and holding in, and that suggests the Fed can hold on too.
Next week, I think, of course, we'll have to turn our heads, as you pointed out, Cindy, to talk about inflation. Some numbers come out I think the middle part of next week, and as you also noted, there are several Fed speakers that are on the diet this week and I think next week too that will probably share some more of their insights and probably further clarify some other policies. But those are things that I would probably point out. Rajeev, as you think about what this might mean for your portfolios, what were your takeaways from the Fed meeting and how do you think we should be positioned going forward?

Rajeev Sharma [00:08:17] I think the Fed is in a situation where they really can't say anything right now. They don't know what fiscal policies are going to be, they don't what the trade and the tariffs are going be. And I think what's going to happen right now is the Fed is not going to make a policy error. A lot of people felt that the Fed was going to preemptive, maybe cut rates sooner than later. But based on the press conference, I don't think the Fed is in any shape to be thinking about being preemptive.
And the problem with that is the market expects them to do something before the tariff situation gets resolved. And we haven't seen a Fed that's willing to do something before any information comes out. And the most important thing is the Fed has always made policy errors in the past. They've thought about inflation being transitory. This statement that they came out with, they said that inflation is not as transitory as they said in the last March statement. So I think the Fed is really thinking about inflation right now, they're thinking about the jobs number right now. This has caused a reduction in the amount of rate cuts that we're thinking about for this year. Up to the Fed statement, there was about three rate cuts pretty much expected for this year. Now we're leaning towards two. Which is pretty much what the Fed had said in their last summary of economic predictions. So it's going to be very interesting to see what the fed narrative is gonna be with the Fed speakers this week. But it's been risk on as far as corporate bonds go, corporate credit spreads have come in. And I really think that the Fed has a big opportunity right now to talk about their narrative. If they try to think about wait and see for longer, I don't think the markets can like that.

Brian Pietrangelo [00:10:18] So for our listeners out there, I'm going to timestamp everything that Rajiv, George, and Cindy said together. So four Fed meetings in the first half of the year, four Fed meetings in second half of year. And if you link the tariff policy and the pause that Trump announced back on April 9th, that's a 90 day pause. So April 9th, May 9th, June 9th, July 9th. So the Fed's really hamstrung to act any time before July 9 and the next meeting after July 9th is on July 30th is right after that. For past the first three months in terms of the June meeting being the last one on June 18th before that 90 days comes up. So very interesting to see that it's hard for the Fed to act when they don't have certainty around tariffs. And we'll get forward to the second half of the year, but very interesting. Thanks for the commentary. George, anything else?

George Mateyo [00:11:04] Well, on the tariff side, Brian, I think there was some news this week, of course, around tariffs and what was announced between the United States and the United Kingdom. And I think we can kind of say this is a deal. This is the first deal of substance in a way that people can point to and maybe kind of glean some takeaways in terms of where trade policy is going to be headed. I want a caveat that was saying it really isn't a deal yet in the sense that it's not going to die, at least as of this morning, the Friday morning, around 10:15 a.m. Eastern Time.
But I think it's a framework, so it's not a deal. And I guess the way it was kind of put together sounds a bit kind of hasty in my view, based on some of the press release and some of that commentary that's come out since then. But those topics aside, what did take place is that it suggested to me that there's gonna be still this 10% tariff on most goods coming from the United Kingdom. And to some extent, to kind of put that in perspective, coming into “Liberation Day,” the overall tariff rate in the U.S. Was somewhere between two and three percent. And of course it quickly escalated and people now thought that maybe at that point, that 10% would be the worst case. Now people are saying that 10% is the best case. So we've kind of had to reframe our thinking around this in a short matter of time. But, and I think we've kinda talked about this in previous conversations.
This is not disastrous news, but it's not good news either. So this is still kind of some bad news and still some headwind for many consumers and also companies alike. But nonetheless, you know, we are kind of moving our way forward in this process. I think this is going to be a key weekend on the trade policy discussions. I think they're just discussions, though. I don't think we would really expect to see anything substantive come out of the conversations between the U.S. and China this weekend. But nonetheless it is going to be this it's kind of on again, off again environment, which is going to be just forced, just going to kind of continued war and certainty that we have to navigate our way through.
At the same time, there's probably some uncertainty at the corporate sector and Steve, we've kind of now made our way through earnings season just about, I think we're almost complete with that, with earnings season for Q1. Are there any takeaways from your perspective that we should think about from the equities market perspective, noting that we're now a couple of points above pre “Liberation Day” levels, and it seems like the market's kind of dragging off some weakness at the corporate level and also in the tariff sector. So what's your takeaway from the equity perspective?

Stephen Hoedt [00:13:19] Yeah. So George, I mean, it really comes down to the idea that once we got past quote unquote “Liberation Day” from a news flow perspective from the market, things have been less bad, right? So almost anything that has come out from a new perspective has either given clarity to the situation that has been evolving or been less bad than the market has expected. And that was all it took to get things to improve.
As we sit here this morning, we're less than a half a percent below the 200-day moving average on the S&P 500. The NASDAQ-100, which is the tech focused index, actually cleared its 200-day yesterday. And you look at some things from the market internals, we've seen continued improvement. We're into what I would call a technically overbought situation, which means we've pushed a little bit too far than we should over a short period of time to the upside. And things may consolidate here.
But at the end of the day, as long as you're in a situation where the news flow is going to continue to be positive relative to expectations, that sets up a situation where you want to buy pullbacks in the market. And I think that the upside bias is going to continue. It would take another shock of some kind of negative proportions to derail the market here. And that's not something that we see. And in fact, I think you could argue that we're at the point where you may see the news flow out of D.C. pivot toward kind of the growth and deregulation argument as opposed to being focused on tariffs.
And that bodes well for our forecast, which we've been telling people since late last year, which was, you know, a kind of a volatile slash down first half of the year and an improving second half of year, that that has pretty much played out to a T as we sit here today. And I think that that's likely going to continue.

George Mateyo [00:15:29] On the tax side of things, I think you're right. We have been talking about that might be somewhat of a, a catalyst for some continued momentum, Steve, but I'm hearing things that suggest that the Republicans are actually kind of moving farther apart from one another than they're coming together in terms of, you know, what's included in this new bill that they've been talking about any thoughts on just overall tax policy that we're starting to kind of think about.

Stephen Hoedt [00:15:52] I try not to get too inside baseball on that stuff, George, but, you know, I think that. They need to show that they can govern and they will come up with something at the last possible moment to show they can. That's my less than sophisticated political analysis of the situation. We'll get some kind of a deal at some point this summer most likely or maybe in the fall. Who knows what it will look like. There'll be lots of back and forth between now and then for sure.

George Mateyo [00:16:28] Maybe I'll take you back to the markets then, since that's probably more you're bailiwick, but any thoughts on some of the headline news this week from some major tech companies to Magnus and Seven, anything you want to comment there with respect to just broader stock market trends?

Stephen Hoedt [00:16:40] So what I will say is that, you know, when you look at, at Apple and Google, the news, they were in the news this week with the antitrust hearings for Google leading to some comments coming out of Apple that regarding AI. Look, I think that everybody knows that AI is a game changer of various sorts. I think people still question what's the killer app for AI. I don't think that we have a really good answer for that yet. But it is clear that it's disruptive and it's here to stay.
So, you know, the fact that business models, traditional business models such as the ad focused business model from Google, So the fact that those are going to come under attack and have to be adjusted, it shouldn't be a surprise to anyone. I think that the numbers that we hear thrown about kind of are the thing that maybe shocked investors a little bit this week. But I think this week was more, I don't know that I would call it a sea change more than I would say that it's kind of a validation of some of the idea that AI is changing the way that the current world has been configured and the winners and losers in the future may look different. And the interesting thing about the Mag 7 is, what this maybe causes you to do is, are the Mag 7 really that magnificent if their business models can potentially be disrupted by these new technologies. Maybe there'll be a new Mag seven years from now, George.

George Mateyo [00:18:22] There likely will, Steve, there likely will.

Brian Pietrangelo [00:18:24] Well thanks for the conversation today George, Steve, Rajeev and Cindy. We appreciate your perspectives. And before we close the podcast for today I'd like to have a wish to all of the mothers this weekend for a Happy Mother's Day. Thanks to all the mothers, grandmothers, stepmothers and everyone else helping to raise our families and societies. What a great appreciation. Again, Happy Mother’s Day to all the mothers out there.
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