In the past week, America's three major stock indices saw significant increases across the board. The Dow Jones Industrial Average rose by 2.15%, closing at 44,424.25 points; the NASDAQ Composite Index increased by 1.65% to reach 19,954.30 points; and the S&P 500 climbed 1.74%, ending at 6,101.24 points. Throughout 2024, these indices have yielded respective gains of 4.42%, 3.33%, and 3.73%. As we stepped into January 2025, a brief market adjustment reflected a slight caution among investors. However, this hesitation swiftly transformed into a strong upward momentum for U.S. stocks.

The Dow Jones Industrial Average exhibited a steady ascent, effectively recovering from earlier declines, inching closer to its historic peak, showcasing the resilience of traditional blue-chip stocks. The NASDAQ Composite matched its historical high, underscoring the vibrancy and momentum in the tech sector. Meanwhile, the S&P 500 surged ahead, setting a record high that captured the market's attention. This reiteration of the "January Effect" is attributed to robust undercurrents boosting the market.

From a macroeconomic perspective, the inflation landscape in the U.S. has shown stability, coupled with a robust labor market, thus furnishing a favorable environment for equity markets. The Federal Reserve has provided clear signals regarding its monetary policy, reducing market uncertainties and fostering investor confidence.

Moreover, financial reports emerging from major banks and tech giants have emphasized their solid financial performances, injecting vigor into stock valuations. The sustained fervor in high-tech industries, particularly driven by advancements in artificial intelligence, has stimulated market creativity, luring substantial capital inflow that collectively supported the stock market's rise in early January 2025.

This week, the Federal Reserve is set to announce its interest rate decision. Market expectations largely suggest that, following last year's reduction of the benchmark interest rate by one point, policymakers might maintain rates within the range of 4.25% to 4.50%. A careful examination of several crucial economic determinants reveals no immediate impetus for the Fed to enact rate cuts at this moment.

The stability of the labor market stands out prominently. According to the latest data, the unemployment rate in December 2024 registered at 4.1%, down from 4.2% in the preceding period and below the anticipated 4.3%. This indicates a resilient capacity within the job market to assimilate new labor. Moreover, the creation of non-farm payrolls surged to 256,000, surpassing the previous month's addition of 212,000 and the forecast of 200,000—indicating businesses are keen on expanding, thereby amplifying economic activity.

In terms of inflation, recent figures indicate a steady pace. The inflation rate for December 2024 increased to 2.9%, representing a 0.2 percentage point rise from November, matching expectations. Notably, the core inflation rate, which excludes the more volatile energy and food sectors, stood at 3.2%, slightly below both previous measurements and forecasts by 0.1 percentage points. This reinforces the conclusion that overall price levels have remained stable, with inflation contained within manageable confines. Given these steady performances in labor and inflation, the upcoming January meeting of the Fed is likely to see policymakers opting to uphold current monetary policies to ensure smooth economic operations.

However, the recent measures taken by the new U.S. administration to tighten immigration and raise import taxes have complicated the Fed's responsibilities. In the initial days of its term, the new government moved to tighten immigration regulations, projecting an increase in deportations and, potentially, imposing higher import taxes come February 1st. This represents the first step in a series of anticipated moves, the effects of which remain somewhat ambiguous.

Vincent Reinhart, a former senior official at the Fed and now Chief Economist at BNY Investments, commented, “The Fed's guidance serves as a forecast, and nowadays, any prediction is intertwined with political economics. One cannot assume possible tariff or taxation legislation prior to year-end will shift monetary policy. There are many variables at play.”

A research commentary from Deutsche Bank stated, “Given the robust economy, stable labor market, and relatively firm inflation rates, we anticipate that the Fed will maintain steady interest rates and continue with a 'gradual/cautious' approach toward achieving a neutral rate unless there's significant softening in the labor market.” They further emphasized, “The uncertainty surrounding impending policy shifts from the U.S. government intensifies the reasons for caution.”

Looking ahead, the effectiveness and direction of U.S. policies over the coming months could significantly impact the Fed's objectives to curb inflation in its final stages. Inflation peaked at a 40-year high in 2022 but is currently only half a percentage point away from the targeted 2%.

This week, the PCE price index for December 2024 will be released. Based on recent price and inflation reports, projections suggest that the year-on-year growth rate for the December PCE price index will slightly exceed the previous month, hovering around 2.5%, with month-on-month growth likely edging above 0.2% or 0.3%.