The Federal Reserve maintained its key interest rate projection on Wednesday, which Wall Street had anticipated. However, the Fed also lowered its economic growth outlook and raised its inflation forecast. This sparked fears among some experts about potential stagflation, where sluggish growth is accompanied by stubborn price increases.
Fed Chair Jerome Powell cautioned against reading too much into the so-called dot plot of interest rate cuts during his press conference. A critical concern is that inflation remains above the Fed’s 2% target, potentially due to tariffs. This could complicate the central bank’s ability to cut rates even if unemployment starts to rise.
“We expect the Fed to cut later this year, but look at the balance of shifts in these forecasts: We’re going from stagflation-light to maybe stagflation-moderate,” said Frances Donald, RBC Capital Markets chief economist, on “Power Lunch.”
Some investors found encouragement in the projection for two rate cuts this year.
Fed’s cautious economic growth outlook
“This is a dovish hold that keeps the door open to rate cuts in the second half of 2025,” said Dan Siluk, head of global short duration and liquidity and portfolio manager at Janus Henderson Investors.
“The Fed is clearly signaling that it is not in a rush but is prepared to act if inflation continues to ease and labor market softness deepens.”
David Kelly, Chief Global Strategist at JPMorgan Asset Management, said on “Power Lunch,” “I think they could hold rates all the way until the end of the year. Right now, do not hold your breath waiting for low rates from the Federal Reserve because they don’t seem to have any intention of delivering them.”
Jim Caron, Chief Investment Officer of Morgan Stanley Investment Management’s Portfolio Solutions Group, said on “Power Lunch,” “What the Fed is basically saying is that the risks to inflation are skewed to the upside. The risk to unemployment is also skewed to the upside.
This is what I think is somewhat being confused as a stagflationary event for markets.”
Bill Adams, Chief Economist for Comerica Bank, said, “The Fed doesn’t have great tools to combat stagflationary shocks like tariff hikes or Mideast oil supply disruptions.”
Richard Flynn, Managing Director at Charles Schwab UK, said, “The larger story here is that there is a clear misalignment between political expectations and monetary policy objectives, as the Fed continues to maintain a wait-and-see approach to gauge the downstream impact of tariffs on the broader economy before taking action.”
Jamie Cox, Managing Partner for Harris Financial Group, said, “The Fed continues to overplay the inflation story and isn’t paying attention to burgeoning demand weakness. While the dot plot forecasts 3 rate cuts through 2026, the more likely scenario is 3 rate cuts by the end of 2025.”
The Fed’s updated rate cut outlook has added more uncertainty to the stock market’s outlook. Investors will be closely watching incoming data and geopolitical developments to gauge the potential impact on the economy and the Fed’s future actions.
