Is the Fed projecting stagflation while pretending everything’s fine? You decide.
KEY TAKEAWAYS
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FOMC kept rates unchanged, as expected
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Dot Plot showed growing divergence—more members now expect only one cut
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SEP revealed lowered GDP growth (1.4%), higher inflation (3.1%), and rising unemployment (4.5%)
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Powell confirmed inflation forecasts are driving rate expectations
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Fed appears stuck in a holding pattern despite stagflationary signals
MY HOT TAKES
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Dot Plot medians hide meaningful hawkish shifts
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The Fed is functionally paralyzed in the face of mild economic weirdness
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Stagflation isn’t just theoretical—it’s now part of the Fed’s base case
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Rate cuts might help market sentiment—but not the economy itself
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Upcoming tariff expirations and the July 4th tax bill are more important than rate policy
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You can quote me: “The Fed lowered growth-- raised inflation-- and upped unemployment-- that’s a stagflation sampler platter.”
Power to the people. First of all, happy summer! Yep it officially starts in the northern hemisphere today. In New York, spring went out with a bang as intense storms rocked the region last night. Speaking of those storms, my quaint little suburb lost power in those storms leaving me scrambling this morning for the first time in a decade. Because it is Friday, there are also limited early-morning commuting options to my downtown office, so I will try to be as quick as possible this morning.
This morning, I want to have a quick discussion about Wednesday’s FOMC meeting. As you probably already know, the committee decided to leave interest rates unchanged. This was broadly expected for some time, and the committee did not disappoint. The real big news of the day was expected to come from the Fed’s Dot Plot. It is an exercise which literally involves Fed members penciling in their projections for the Fed Funds rate at the end of this and the next few years.
First of all, who cares where FOMC members expect interest rates to be in December of 2026. By “who cares” I don’t mean that I wouldn’t like to know, but rather, the reality that my dog Eloise can probably forecast that as accurately as the venerable Fed bankers. No. We really care about what the Fed might do over the next few months leading to the end of this year.
Leading up to the meeting, Fed Funds futures were predicting 2 rate cuts before the end of the year. 100% of one and an 86% chance of a second; 86% is pretty good odds on Wall Street, so we pencil in 2 cuts. I, like many of my Wall Street colleagues, was expecting the potential that the new Dot Plot would predict only 1 cut before year end. That would be in contrast to the Fed’s March Dot Plot which called for the 2 cuts. The change would be a hawkish one and had the potential to disappoint those that believe that rate cuts are the salvation to all their equity growth prospects; I don’t, for the record.
In fact, I am on the record with that. I told Madison Mills, my co-host on Yahoo Finance Catalysts live stream earlier in the month, that a rate cut would be a “happy pill” for equities, but it would certainly not solve the economic challenges presented to the economy today. You can watch that here if you want that multimedia experience.
Well, I am pretty sure that the Fed wasn’t watching, but there was a hint that they agreed with my assessment. The interesting take away from the Dot Plot was not necessarily the fact that the 2-cut projection was unchanged, but rather the disbursement of the dots. The projection you see is only a median of all the FOMC members’ projections (voting and not-voting members). And, as I hope you have learned, especially my long-time followers, averages can be misleading. That said, by looking at the actual dots we can see that there is a wide distribution of projections and that a few new members jumped into the 1-cut camp. This wouldn’t affect the average because it is not weighted, but the hawkish move should be noted.
Stepping back a little, the Dot Plot is actually part of the Fed’s quarterly, Economic Projections where FOMC members forecast a whole range of important numbers. By observing the SEP, we can perhaps glean even more information about what policymakers are thinking. Oh, sorry, SEP stands for Summary of Economic Projections–SEP is geek-talk. By looking at Wednesday’s release, we learn that the FOMC expects GDP to end up at 1.4% for the year. While it should be comforting that it is positive, it is important to note that the FOMC penciled 1.7% in March, so essentially, the economist-bankers are lowering estimates.
Looking further, we note that the Fed raised its estimates for PCE Inflation for the year from 2.8% to 3.1%. It is that very number that is at the core of all the worry: inflation. Not only is it obvious that FOMC members are concerned about tariff-driven inflation, but Chairman Powell told us as much in his post-release presser. He quite clearly said that the FOMC members dots were directly tied to the members’ projections of inflation. You can’t tell that from the projection tables or Dot Plot, but the Chairman helped us out with that clarification.
Finally, we note that FOMC members, on average, believe that the Unemployment Rate at the end of the year will be 4.5%, higher than their 4.4% assessment in March. So, in summation, the Fed’s FOMC policymakers, since March, have lowered economic growth estimates, raised unemployment projections, and increased their forecasts of inflation. That my friends is an unmistakable stagflationary tilt. Recall that stagflation is an economic condition characterized by slow/no growth and high inflation. It is a central banker's worst nightmare.
Do you think the FOMC bankers are having nightmares? Well, apparently not, because they seem quite content with keeping policy unchanged. In fact, I wouldn’t be surprised if they all got matching T-shirts that read “uncertain–waiting to see.”
Look, the Fed is extremely important and its policies are highly effective. Unfortunately however, its massive power is most useful in extreme conditions. While current conditions may feel like they are extreme, they really are not from an economic standpoint. The economy is relatively healthy, unemployment is relatively low, and inflation is relatively tame. Any minor policy tweaking is not likely to have a material effect on any of those important factors, only serving to beautify the optics and make people feel good.
So, really, my friends, nothing new from the VIP bankers, really. They are waiting just like we are waiting to see what, if any impacts tariffs will have on inflation. It hasn’t really yet, but any likely moves are expected in late summer to early autumn. As summer will quite literally start tonight at 10:42 PM, I’d rather prefer to deal with the here and now–for now. There are plenty of other important market-moving factors swirling around. In just a few weeks, the delay period from the “liberation day” tariffs will expire. Just days after the July 4th deadline set by the administration for the tax reconciliation bill. How those play out will have a more immediate impact on your portfolio. Not to mention earnings season which will kick off in a few days after that. Most immediately, I am hoping to get my power back in short order. ⚡
WEDNESDAY’S MARKETS
Stocks had a mixed close on Thursday as the Fed’s FOMC did pretty much what everyone expected leaving only the possibility of military escalation to catalyze further fear amongst investors. Bond yields across the curve were virtually unchanged.