Fed Is Expecting Stagflation

THE FED DID THE EXPECTED AND KEPT INTEREST RATES UNCHANGED FOR THE FOURTH CONSECUTIVE TIME AT 4.25%-4.50%

THE NEWS

You’ll surely remember that Donald Trump repeatedly called for a 2 percentage point cut in interest rates. That’s where we laugh. Because not only did Jerome Powell not do that, but in the press conference that followed, he explained with absolute clarity why the FED doesn’t intend to act preemptively. “We’ll wait for the data,” he said. And just like that, the game continues.

But let’s put things in order.

According to the revised Summary of Economic Projections for 2025, the majority of FED members foresee two rate cuts of 25 basis points. Nevertheless, there’s internal disagreement. Seven members now see no rate cuts at all (up from four in March), while only eight still see two cuts (down from nine). The long-term rate target for the end of 2027 has been raised from 3.1% to 3.4%, indicating a shift toward a more restrictive long-term policy.

(a) The GDP forecast for 2025 has been downgraded to 1.4% from 1.7%,
(b) Unemployment is expected to reach 4.5% (up from 4.4%), and
(c) Core PCE inflation has been revised up to 3.1% (from 2.8%).
All these paint a stagflation scenario—higher inflation, lower growth. Which fully explains the FED’s cautious stance.

WHAT POWELL SAID

Then came Jerome Powell’s regular and always revealing speech. What did we learn?

• The FED still does not trust inflation’s stability. Despite its significant decline in recent years, it remains above the 2% target.

• Tariffs, according to Powell, could trigger considerable inflationary pressures in the coming months. Whether these will be temporary or more permanent… no one knows yet.

• The labor market remains strong. Unemployment is slightly rising, but layoffs are limited, and job openings are gradually decreasing—without causing panic.

• The government's immigration policy is expected to reduce the overall labor supply, which could lead to wage increases—and thus renewed inflationary pressure.

• And of course, there’s the geopolitical backdrop: energy shocks, trade wars, and high uncertainty.

What Powell made clearer than ever is that the FED is in stand-by mode. It promises nothing, rules nothing out, and watches the data closely. In other words, it’s doing the right thing.

Posted Using INLEO