by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on Powell’s final meeting as Fed chair. We then examine AI earnings and provide an update on developments in Iran. Next, we briefly discuss the prospect of Japanese intervention in currency markets and the possibility that the US may withdraw troops from Germany. As always, we include an overview of recent domestic and international economic data.

 Powell’s Farewell: Federal Reserve Chair Jerome Powell held his final press conference on Wednesday following the FOMC’s two-day meeting. Fed officials voted to hold rates unchanged at a range of 3.5% to 3.75%. The decision drew dual-sided dissents by four members, which hasn’t occurred since 1992. One member favored a rate cut, while the others preferred language that would remove any suggestion of future easing. The meeting highlights the growing divide among Fed officials as they prepare for the next Fed chair.

• The Fed statement showed an overall shift in sentiment regarding how the conflict in Iran is affecting its outlook on the economy and inflation. Specifically, the statement removed the qualifier “somewhat” when describing elevated inflation, in part due to rising energy prices. It also changed its assessment of the Middle East, now stating that developments are “contributing to uncertainty in the economic outlook.” This is a shift from its previous statement, which showed hesitancy about whether the conflict would impact the economy.
• While the statement did not reference the future direction of monetary policy, it featured unusual dissents over a perceived easing bias. Three Fed officials dissented against the statement’s language. These dissents likely served as a counterweight to Stephen Miran’s vote in favor of a cut, which, if left unchallenged, could have led markets to interpret the FOMC as having greater appetite for rate cuts than most Fed officials actually had during the two-day meeting.
• Powell used the press conference to narrow the apparent divide by stressing that policy is not on a preset course. He said the FOMC currently sees no need for a rate hike but left the door open to one if conditions warrant. He also indicated that the scope for additional cuts may be limited, given where rates stand relative to the neutral rate, the theoretical level at which policy is neither stimulating nor restraining economic growth.
• In other news, Powell clarified his post-chairship plans. Although his tenure as Fed chair is ending, his term as a governor extends through January 2028. Powell intends to remain on the Board for the duration of any potential investigations into the Fed. While he hasn’t set a firm departure date, he noted that his remaining time as governor will be low-profile to ensure he does not overshadow his likely successor, Kevin Warsh.
• The transition from Powell’s chairship to Kevin Warsh is likely to be bumpy as markets reassess the future path of policy. Warsh has signaled discomfort with the current degree of transparency and may seek to scale it back, potentially by holding fewer press conferences. In our view, the combination of heightened internal disagreement at the Fed and a possible reduction in public communication could add to bond‑market volatility.

AI Earnings: Several big‑tech names reported earnings on Wednesday to a mixed reception, as investors continue to press for greater shareholder returns. Each company delivered strong results, with Alphabet, Meta, Amazon, and Microsoft all posting solid earnings growth, particularly in their cloud businesses. However, investors were unimpressed, as these firms are still prioritizing higher capital‑expenditure plans, which will likely delay a more meaningful return of capital to shareholders.

• Alphabet emerged as the clear winner on the night, while Meta lagged. Alphabet distinguished itself from several peers by demonstrating that its cloud business continues to consistently beat market expectations. Meta, by contrast, does not operate a cloud‑computing platform and has ramped up capital spending without yet convincingly showing that it can translate its AI investments into comparably strong financial results.
• With hyperscalers on pace to spend over $725 billion in capex, the market is clearly signaling a strong appetite for these tech firms. This surge in spending will likely force investors to start questioning the underlying valuations of these companies, as it remains unclear whether stock prices have room to grow given their substantial rise over the past few years. That said, we believe the preference for tech will likely shift toward companies that benefit directly from this increase in spending.

Iran Update: The fragile truce between the United States and Iran is fraying as the two sides remain unable to agree on a deal. The White House now appears more willing to contemplate the use of additional force to break the deadlock. Tensions escalated after Washington rejected Tehran’s request to reopen the strait while nuclear talks continue, insisting instead that Iran end uranium enrichment as a condition for lifting the blockade. The standoff has already contributed to higher oil prices.

• Tensions are escalating as the United States searches for ways to break Iran’s grip on the strait. White House officials have reportedly discussed the possible use of hypersonic missiles to signal the level of force Washington is prepared to deploy to reopen the waterway. At the same time, the US is seeking international support to build a coalition aimed at restoring freedom of navigation through the strait.
• The ceasefire has not been formally revoked, but there are mounting signs it is fraying. On Wednesday, the United States indicated that Israel will retain the right to carry out limited strikes in Lebanon under any agreement, a position that is likely to deepen tensions with Iran, which insists that Israeli attacks on Lebanon must stop as a condition for sustaining the truce.
• Rising US‑Iran tensions are likely to add to economic uncertainty and provide support for commodity prices. While risk assets have remained relatively resilient so far, they could start to show signs of moderating if direct fighting between the two sides resumes. We continue to believe that, although the growth outlook for equities remains attractive, the risk of conflict‑related shocks means that maintaining exposure to value‑oriented sectors is important for investors seeking a more balanced portfolio.

BOJ Intervention: The Bank of Japan has signaled that it may intervene in currency markets to defend the yen against speculative pressure. The warning comes as the Japanese currency has weakened against the US dollar amid doubts over how far policymakers are willing to tighten policy in response to rising inflation. Any move to lean against further yen depreciation would likely act as a modest headwind for the US dollar, which has been strengthening in recent weeks.

 Troop Withdrawal: The US is weighing the withdrawal of some troops from Germany after Chancellor Friedrich Merz criticized Washington’s lack of a cohesive strategy on Iran. Yet, even amid these tensions, the US has reinforced defense ties by deploying officers to support military integration, suggesting the withdrawal threat may be more rhetorical than real. Still, repeated talk of pulling back US forces could spur Europe to increase defense spending, potentially boosting the region’s defense sector.

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