A 'Credibility Shock' Looms Over the Fed

The Federal Reserve decided this week to keep its main interest rate the same. The vote was close, with a final count of 9 to 3. Fed Chair Kevin Warsh gave mixed messages about what the bank plans to do next. This left many investors confused and worried about inflation.

The Fed uses interest rates as a tool to fight inflation. When rates go up, it costs more to borrow money, which slows down price increases. When rates go down, borrowing is cheaper and can help the economy grow. For years now, prices have been rising faster than normal, causing stress for everyday Americans.

Warsh held a press conference after the vote and said some surprising things. He hinted the Fed might look at inflation measures beyond its usual tool, the Personal Consumption Expenditures index. He also said that rising bond market rates might have already done some of the Fed's work for it. These comments made many investors nervous.

An economist at Bank of America called the market's reaction a 'credibility shock.' That means investors have started to doubt whether the Fed is truly committed to fighting inflation. The yield on the 30-year U.S. Treasury bond rose to 5.23 percent, the highest level since 2007. Traders now see a 60 percent chance the Fed will raise rates in September.

President Trump also commented on the Fed's decision. He praised Warsh and said he believed the Fed chair would like to lower rates. Trump has long pushed for lower interest rates. His remarks added to the uncertainty already swirling around rate policy.

In the tech world, Microsoft had a very strong quarter. Its profit jumped 31 percent to $35.8 billion, boosted by its fast-growing cloud computing business. Microsoft is spending big on AI data centers, and those investments appear to be paying off. Its cloud unit posted its fastest growth in four years.

Meta, which owns Facebook and Instagram, had a rougher quarter. Its profit fell 14 percent even as revenue hit a record high. Meta is also spending heavily on AI, but investors are struggling to see the returns. The company's free cash flow dropped from over $12 billion to just $784 million in a single quarter.

Fashion brand Reformation began trading on the stock market this week. The eco-friendly company is known for its stylish, sustainably made clothes and celebrity fans like Taylor Swift. It priced its shares at $15 each, valuing it at nearly $900 million. Despite higher costs from tariffs, the company earned a profit of $12.6 million last year.

A Stanford spinoff called Simile raised $200 million this week. The startup uses AI to predict how people think and respond to questions. Businesses like CVS Health and Deloitte already use Simile's technology. The company was inspired by a 2023 research paper about AI agents simulating human behavior.