The Fed won’t call it stagflation, but investors should pay attention to the numbers, the policy trap, and the risks to 60/40 portfolios.
KEY TAKEAWAYS
Jerome Powell was asked about stagflation at the March 2026 FOMC press conference. He said the economy does not meet that definition and reserved the term for more severe conditions.
Avoiding the word carries meaning. The choice not to use a label can signal caution without triggering alarm.
Growth is slowing while inflation remains above target. GDPNow was around 2.0% and core PCE was about 3.06% year over year.
The Fed is in a policy bind. Cutting risks reigniting inflation, while staying tight risks further slowing growth.
A traditional 60/40 portfolio becomes less reliable. Stocks and bonds can both come under pressure in this environment.
MY HOT TAKES
The distinction between “not yet” and “not at all” matters. It signals that conditions are moving in that direction without confirming it outright.
Labels are secondary to conditions. Markets respond to growth, inflation, and policy constraints, not the words used to describe them.
The setup is uncomfortable but familiar. Similar dynamics have historically required adjustments rather than emotional reactions.
Stagflation develops over time. It tends to emerge through a series of small shifts rather than a single defining moment.
Traditional diversification assumptions can break down. Recognizing that shift early allows for more deliberate portfolio positioning.
You can quote me: “The deliberate choice to avoid a word is just as telling as using it.”
Keep it clean! I grew up in the late 1960s / early 1970s–a time during which simply uttering the wrong word could end you up with a bar of soap in your mouth, or even worse. These days, of course, pretty much anything goes, and in many cases “cussing” as it was referred to in those glory days, is almost a requirement to get anyone' s attention in the dull din of blah, blah, blah that we are hit with on a daily basis. Back when I was in short pants there was a well-known list of words that were simply barred–don’t even think of it. I miss those days, though I have been known to weave some of those formerly-off-limits utterances time and again.
Now, switching our focus to the economic, investing, and financial narrative stream. I generally keep the volume off of the TVs that line my wall behind my camera–they are mostly for show. But occasionally, I will turn the volume up if I notice an interesting headline or a guest that I am interested in. The other day–and this is a true story–I noticed an acquaintance of mine who is a Washington whisperer on political risk. He was on a major financial network assessing the Iran war risk. It was a great piece–he is well-respected. He got a bit fired up and it happened. BOOM. He dropped the S-bomb–on national television. The guy who is supposed to push the “beep” button was obviously scrolling on TikTok, because it landed right on my forehead. I didn’t know whether to smile or laugh, but I am pretty sure I followed it up with an S-bomb of my own, uttered under my breath, of course.
Ok, so Wall Street is an emotionally-charged venue, and I am pretty sure that the S-bomb, which used to be the second-worst word you could use in the 1960s, is pretty much the bread-and-butter of the lingua franca. But to be clear, we on Wall Street have our own stable of words which could get someone in trouble. The other day I wrote about the R-word–recession–and how it is just a word, but using it has many, many implications, the least of which is instilling fear in consumers. We don’t want to scare consumers because they make up nearly 70% of GDP.
The Fed is at the very base of almost every narrative on the US Economy–the GLOBAL Economy, the markets, your wallets, and–these days–even politics. The Fed has its own subset of words that are simply not to be used. One of those words that comes to mind–and it’s a newer addition–is transitory. That was a word that the Fed used in 2021 to describe higher prices that would not leave behind structural inflation. In other words, it was supposed to be–supposed to be–temporary. Well it wasn’t and the word has since become associated with one of the Fed’s biggest policy errors in its history–and there are many of them.
Another one of those words, but from a different era has recently begun to make its rounds through economics discussions and possibly on the fringe of your favorite mainstream media outlets. At Jerome Powell’s press conference following the latest Federal Open Market Committee meeting March 2026, a reporter asked directly whether current economic conditions could be described as stagflation. Powell responded that he would reserve the term for more severe circumstances and stated that the US economy does not meet that definition. He acknowledged that there are competing pressures between inflation and employment that the Fed is managing. The exchange was brief, direct, and very much centered on the use of the word “stagflation.” It is possibly only a subtlety that was picked up by someone of my particular vintage. Add to that the fact that I am always on the hunt for risks, while most of my colleagues start by hunting for opportunities. Opportunities are my step 2. 😉 Let’s discuss–and excuse my French–stagflation.
Stagflation! There. I said it. And I want to be fair to Powell, because his instinct to protect the word for a more severe set of circumstances is not unreasonable. The 1970s version was genuinely catastrophic–unemployment in double digits, inflation in double digits, and a misery index that was historic by any standard. But here is the thing about words on Wall Street. They carry weight that extends well beyond their dictionary definitions, and the deliberate choice to avoid a word is just as telling as using it. 👀 Powell didn't say conditions are fine. He said conditions don't yet meet the bar for that particular label. That is a different statement entirely, and it is the kind of distinction that only someone with a few decades of scar tissue tends to pick up on. 😉
So let me tell you what the numbers actually say, because your portfolio doesn't care what we call it–it only cares what it is. The Atlanta Fed's GDPNow model, which is a real-time tracker of economic output based on incoming hard data, was sitting at 2.0% for Q1 2026 as of its March 23rd update. That is a sharp deceleration from where it started the quarter, above 3 % just weeks earlier. At the same time, core PCE–the Personal Consumption Expenditures price index excluding food and energy, which is the Federal Reserve's preferred inflation gauge–came in at 3.06% year-over-year for January 2026, the most recent reading available. So what you have, in plain English, is growth that is slowing and inflation that is running more than a full percentage point above the Fed's 2% target. Growth heading south. Prices staying elevated. If you are of a certain age–and I suspect many of you are–that combination has a very familiar feel to it.
The Fed is sitting in the middle of this with essentially no clean move available. If they cut rates to support growth, they risk reigniting inflation, which is already above target. If they hold or hike to keep inflation in check, they risk pushing the economy into a sharper contraction. That is the policy trap, and it is precisely why the word nobody wants to say is beginning to circulate in serious economic conversations for the first time in a very long time.
For investors managing a traditional 60/40 portfolio, which is 60% stocks and 40% bonds, this environment is particularly uncomfortable, and it is important that you understand why. The standard assumption embedded in the 60/40 model is that stocks and bonds move in opposite directions. When stocks sell off because the economy is weakening, bonds are supposed to rally as investors flee to safety and as the Fed cuts rates in response. That is a kind-of hedge. It is elegant when it works. But in a stagflationary environment, that correlation breaks down badly. Growth slowing means equity earnings come under pressure, and stock prices eventually follow. But inflation staying elevated means bond prices struggle too, because the fixed coupon payments on your bonds are being eroded in real terms. Both legs of the portfolio can weaken simultaneously. I watched that dynamic play out from the outside looking in during the late 1970s and early 1980s, and then spent the better part of four decades on Wall Street learning exactly why it was so damaging to portfolios that weren't positioned for it. The playbook that worked the previous decade simply stopped working, and investors who did not adjust paid a steep price for their loyalty to a model that the environment had outgrown.
That is exactly the kind of risk I want you thinking about right now. Not panic–thinking. There is a very big difference, and it is the difference between investors who navigate difficult cycles successfully and those who make decisions driven by fear in either direction.
What gets me through these moments, and what I believe can get you through this one, is a clear-eyed understanding of what is actually happening versus what the labels say. Powell is right that this is not the 1970s. But the 1970s did not start out looking like the 1970s either. 🤣 It built gradually, and the investors who fared best were the ones who acknowledged the early signals, assessed their exposures honestly, and made deliberate adjustments before the situation forced their hand. Real assets, commodities, inflation-protected instruments, and shorter-duration bond exposure have all historically provided meaningful buffer in stagflationary environments. None of them are perfect, and none of them are free–remember as I always say, there is no free lunch on Wall Street. But understanding the menu is the first step toward making a rational choice about what belongs on your plate.
You may not be surprised to learn that I know the taste of soap–I could not always avoid the occasional slip when I was a kid back in the 1970s, and my mother had strong views on the subject. But I also know the taste of stagflation, because I watched it up close and I observed what it did to portfolios, to confidence, and to the broader economy over the better part of a decade. That experience is precisely why I want to fill you in now, while there is still time to think clearly and act deliberately rather than reactively. The Fed will eventually find its footing. Markets will eventually reprice. And investors who stay informed, stay diversified, and stay disciplined through periods of uncertainty are the ones who look back on them not as catastrophes, but as the moments that defined their long-term results. That outcome is still very much within reach. You can take the soap out of your mouth now. 🫧
YESTERDAY’S MARKETS
Stocks staged their best session since May yesterday, with the S&P 500 up +2.91%, the Nasdaq up +3.83%, and the Dow up +2.49%, as reports that Iranian President Pezeshkian may be open to ending hostilities sparked a broad risk-on rally. The gains came on the final day of a brutal quarter which saw the S&P 500's worst since 2022. Oil pulled back, with WTI settling near $101 per barrel, though gasoline at the pump crossed $4 per gallon nationally for the first time since 2022. The 10-year Treasury yield eased to 4.31% as traders added duration on hopes that a potential de-escalation could take some pressure off energy-driven inflation.
NEXT UP
ADP Employment Change (March) came in at 62k, beating estimates but below than last month’s upward-revised 66k additions.
Retail Sales (February) grew at 0.6% after declining by -0.1% in January.
ISM Manufacturing (March) may have slipped slightly to 52.3 from 52.4.
Fed speakers today: Musalem and Barr.