Prof G Markets – "Fed Holds Rates — Inflation Back in Focus"

Date: January 29, 2026
Hosts: Ed Elson (Vox Media), with guests Michael Gapen (Morgan Stanley), Gil Luria (DA Davidson)

Overview

This episode dives into the Federal Reserve’s latest decision to hold interest rates steady after three consecutive cuts, and explores implications for inflation, markets, and the global economy. The conversation spans labor market dynamics, dollar devaluation, gold, and the complex interplay between policymakers. The show also covers major earnings reports from Meta and Microsoft, probes AI market sentiment, and recommends Adobe as a potential investment.

Key Discussion Points & Insights

Market Check & Fed Decision

• S&P 500 hits 7,000 for the first time, but market ends flat after the Fed announcement ([01:48]).
• Fed holds rates steady post three consecutive cuts, citing “some signs of stabilization” in unemployment and “somewhat elevated” inflation.
  • Quote: “In his remarks, Chair Powell said that the outlook for economic activity has, quote, clearly improved since the last meeting.” – Ed Elson ([02:26])
• Two Fed governors dissent, voting in favor of a further rate cut.

Reactions and Analysis: Michael Gapen, Morgan Stanley ([03:16]–[20:08])

Nature of the Fed’s “Hold”

• Decision widely expected; “the real question was: Is this a hawkish hold or a dovish hold?”
  • Quote: “What I was looking for—was it a hawkish hold or a dovish hold? And I think we did get the latter.” – Michael Gapen ([03:35])
• Labor market showing stabilization; “no big upside risk to inflation.”

Rate Cuts: Now Driven by Inflation ([04:41])

• Shift from “labor market-based” cuts to “inflation-based” cuts.
  • If inflation falls, further rate cuts likely. “If disinflation doesn’t happen, or if inflation firms further...the Fed has to even consider rate hikes.” – Gapen ([05:57])
• Fed not considering rate hikes as a baseline.

Inflation: Is the Fed Comfortable? ([06:41])

• Fed increasingly confident inflation will come down, though current figures (2.7%) are above target (2%).
• Tariffs driving up goods inflation, but “outside of tariffs, it looks like inflation is decelerating toward target.” – Gapen ([07:15])
• Fed sees tariff pass-through as temporary; expects core inflation to moderate once effects dissipate.
• Risk: “We shouldn't be so quick to declare victory on inflation.” – Gapen ([09:45])
• Fed policy remains “modestly restrictive” to manage risks, acknowledging incomplete inflation data due to the recent government shutdown.

Dollar Devaluation & Gold Concerns ([11:36])

• Dollar at a four-year low; gold surges amidst rising concerns about US currency and fiscal policy.
• Powell: “We don’t take a strong signal from rising gold prices.”
• Gapen explains Fed doesn’t target currency value – “all of that is getting reflected in the dollar.”
  • The US carries about $62T in dollar-based assets globally; there is no feasible alternative on that scale ([13:38])
• Dollar volatility likely to persist due to macro and geopolitical uncertainty; gold and crypto see demand as “escape valves.”
  • “There’s a lot of concern about where U.S. policy is going. The rest of the world holds a tremendous amount of US dollar-based assets.” – Gapen ([14:12])

Policy Responses & Fed Chair Speculation ([15:56])

• President and Treasury Secretary play down dollar volatility; markets, however, remain sensitive.
• On the next Fed chair: Rick Rieder, Kevin Warsh, and Chris Waller are contenders.
  • “Rick is certainly capable…whether it’s him, Kevin Warsh, or Chris Waller, all are capable to do the job. Recent events tell me more about who it’s not going to be than who it will be.” – Gapen ([18:18])

Meta & Microsoft Earnings: Gil Luria, DA Davidson ([23:10]–[34:10])

Microsoft Earnings

• Modest top-line beat; after-hours share decline due to Azure cloud growth slightly below expectations (38% vs 39%) ([24:13]).
  • “The growth of Azure this year is already in the books. They’re in very good shape.”—Luria ([24:13])
• OpenAI is now 45% of Microsoft’s “remaining performance obligations.”
  • Luria: “Any dollar that OpenAI gets, Microsoft has first claim to it…That makes us feel better about that.” ([25:51])

Meta Earnings

• Sales up 24% YoY; guidance impresses, shares +10% after hours.
• CapEx guidance: $115–$135 billion for 2026. Markets reward aggressive investment this time
  • “Core Meta selling ads business is doing so well, investors are willing to give Mr. Zuckerberg a pass…He’s still growing that ads business in the mid-20s.” – Luria ([27:35])
• Meta “a significant share gainer” from Google in ad business ([27:35])
• AI investment: Meta is leveraging AI for better ads and more compelling content, driving both volumes and CPMs ([28:57]).
  • “Our algorithms for feeding for our feed are getting so much better…they can drive that kind of remarkable growth.” – Luria

Valuations & Market Narrative ([29:44])

• Microsoft at lower end of historic PE (26x); Meta in low 20s.
• Google now valued at a premium; “That’s all narrative, this belief Google has already won AI—the game’s over. I’m a little skeptical...” – Luria ([30:01])

Shifts in AI Sentiment & “Bubble” Fears ([31:46])

• Market “vibes” most positive for Google, least for Microsoft/Nvidia—but underlying fundamentals favor Microsoft/Nvidia for AI profit upside.
• On the “AI bubble”: Real demand and investment persists, though there’s “bubblicious behavior” around the periphery—especially highly leveraged or speculative data center deals ([33:03]).
  • “At the core...our global economy is going to continue to invest in AI, and get good results from that. In any big technology cycle, there’s bad behavior...but at the core, this is a good investment.” – Luria

Featured Stock Pick: Adobe ([34:14])

The Case for Adobe

• Stock down 33% in a year despite still-strong fundamentals.
• Revenue growth has slowed to 10% annually, but on a substantial base ($24B, vs. Canva’s $2-3B).
• Margins remain outstanding (90% gross margin, $7B profit).
• AI “bear case” is overblown—Adobe’s AI tools already generate $5B+ in annual recurring revenue.
  • “AI is both enhancing operations inside the company but also making the product better.” – Ed Elson ([34:14])
• Massive “short-form vertical video” trend boosts demand for Premiere Pro and related products—an underappreciated tailwind.
  • “If you’re doing [short-form editing], it’s most likely your team is using Adobe’s products—specifically Premiere Pro.” – Ed Elson
• Competitive risks (Figma, Canva) mitigated by the growing market and Adobe’s entrenched user base.
• Current valuation (P/S 5.5x, P/E 18x) at multi-year lows.
  • Memorable line: “Two adjectives come to mind for us: wonderful and fair.” – Ed Elson

Notable Quotes & Memorable Moments

• “Was it a hawkish hold or a dovish hold? And I think we did get the latter.” — Michael Gapen ([03:35])
• “Fed cuts shift from labor-market based to inflation-based cuts…What would mean the Fed doesn’t cut is that disinflation doesn’t happen.” — Gapen ([04:57])
• “We shouldn’t be so quick to declare victory on inflation…we should really have a watchful eye. Inflation has been above…the Fed’s 2% target going on five years.” — Gapen ([09:45])
• “There’s really no asset class where the rest of the world can say, well, we don’t want dollar assets anymore…there is no other market to rebalance to.” — Gapen ([13:38])
• “Core Meta…selling ads business is doing so well, investors are willing to give Mr. Zuckerberg a pass…He’s still growing that ads business in the mid-20s, which is remarkable at this scale.” — Gil Luria ([27:35])
• “At the core, our global economy is going to continue to invest in AI and get good results from that. In any big technology cycle, there’s bad behavior…but at the core, this is a good investment.” — Luria ([33:03])
• “The secret to investing is to find wonderful companies at fair prices. Well, this is a company with 90% gross margins, $24B in revenue, $7B in profit, trading at its lowest valuation in years.” — Ed Elson ([34:14])

Important Timestamps

• Fed’s rate decision & initial analysis: [03:16]–[04:41]
• Inflation and future policy: [04:41]–[11:36]
• Dollar and gold analysis: [11:36]–[17:52]
• Fed chair speculation: [17:52]–[20:08]
• Meta & Microsoft earnings recap: [23:10]–[34:10]
• Adobe stock deep dive: [34:14]–[End]

Conclusion

This episode offers expert analysis of the Fed’s balancing act between inflation and labor markets, insight into the broader implications of currency moves, and thorough breakdowns of tech titans’ earnings. The team also spotlights Adobe as an “unloved” but fundamentally strong value pick, challenging current market narratives. The tone is candid, no-nonsense, and informed by real market skepticism—a useful listen (or read) for anyone focused on markets, macro, and tech investing.