To The Moon

$Palantir Technologies Inc.(PLTR)$

The Federal Reserve and its board of directors met last Friday and decided to keep interest rates unchanged. However, they made some comments that could influence the direction of future interest rates. Following the meeting, both the 10-year and 30-year government bond yields rose. In this video, I'll explain why that happened and discuss what these changes could mean for stock market investors. I’ll use Paler stock as an example to illustrate how its valuation could shift based on interest rate changes from this meeting. These kinds of updates are important because the central bank’s decisions on interest rates can significantly impact stock market investors like us.

Now, let’s jump into the Federal Reserve’s statement from January 29th, 2025. They said that recent data indicates the economy is growing at a solid pace, unemployment has remained low, and the labor market is still in good shape. However, inflation is still somewhat elevated. I believe these observations are accurate, and here’s why:

The Fed mentioned that unemployment has stabilized at a low rate. If we look back at 2023, the unemployment rate hit a low of about 3.4% in January but then started rising steadily, eventually reaching over 4%. This steady increase was concerning to many, as it raised fears of a potential recession. But in recent months, the unemployment rate has leveled off, and it may even be slightly decreasing. Looking at a one-year chart of unemployment, you can see that since about August 2024, the rate has either stayed steady or gone down. This is why the Federal Reserve is less concerned about a potential recession now.

The Fed had previously cut interest rates several times to combat the rising unemployment, as lower interest rates stimulate economic activity. Lower rates reduce monthly payments for cars, mortgages, and credit cards, encouraging people to spend more. This helps keep the economy moving. But now that unemployment is more stable, the Fed is less worried about a recession and doesn’t feel the need to lower rates further.

One of the points the Federal Reserve made is that inflation is still higher than they'd like. You can see this clearly in the data. If we look at the one-year chart of U.S. inflation, you can see inflation steadily decreased from April to October 2024, which was in line with the Fed's goal, as they target a 2% inflation rate. The reason they aim for 2% is that it's considered a healthy inflation rate. If inflation were at 0%, people might delay spending because they wouldn’t feel urgency to buy now, anticipating prices to stay the same or drop. This would slow down economic activity. On the flip side, if inflation were negative (deflation), it could lead people to hold off on purchases, anticipating prices to keep falling. This could trigger a vicious cycle, which would be bad for an economy like the U.S., driven heavily by consumer spending, which makes up more than two-thirds of the economy.

So, the Fed’s goal is to maintain moderate inflation, and until October 2024, it seemed to be on track. However, since then, inflation has started to rise again, and the main driver of this increase has been the effects of election results. The shift in expectations, particularly regarding the Republican Party and Donald Trump, led to increased optimism in financial markets. This boosted asset prices across the board, including stocks and cryptocurrencies, increasing wealth and driving up spending. This spending is contributing to higher inflation. So, when the Fed says inflation remains elevated, I agree with their assessment.

Another important point the Fed made is that the economic outlook remains uncertain. The central bank is balancing the risks on both sides of its dual mandate: managing unemployment and inflation. More jobs could lead to higher inflation because people have more disposable income to spend. On the other hand, higher unemployment can lower inflation. Right now, the Fed sees these forces as roughly equal, which is a shift from the past year, when inflation was the primary concern. Six months ago, the worry was rising unemployment, but now the Fed is focused on balancing both factors.

What this means is that the Fed is unlikely to drastically lower interest rates in 2025 unless these factors change. Given the current political and economic situation, I don’t expect these policies to bring down inflation anytime soon. In fact, many of the current policies are likely to be inflationary. So, if you’re hoping for more interest rate cuts, this meeting suggests that there will likely be fewer cuts than expected, and overall interest rates are likely to remain higher in 2025.

So, what does all this mean for Growth stocks?

Higher interest rates generally lead to lower stock valuations. The reason is that government bonds, which are considered low risk, become more attractive when interest rates rise. If you can invest in a government bond offering a higher return, it becomes a more appealing option than stocks, which come with more risk. This is where my discounted cash flow valuation models come in. One of the key factors in these models is the "risk-free rate," which is mostly driven by government bond yields. So, higher interest rates typically mean lower stock prices, and the magnitude of the change depends on the company. Companies that expect most of their cash flows to come in the distant future—like SoFi—will see a more significant change in valuation than companies like Coca-Cola, where cash flows are more predictable and nearer-term.

I hope this helps clarify the Fed’s policy decision and what it could mean for stock prices, like Paler.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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