Andrew Pyle
March 19, 2025
Fed whispers of stagflation
Economists have been debating whether or not the U.S. economy is about to enter a phase that we haven’t seen for a while, one where growth weakens but where inflation stops falling and pushes higher. Yes folks, that dreaded term “stagflation”. Well, the statement released from the Federal Reserve at today’s FOMC meeting suggests officials are musing about such a risk. There was no surprise that we saw no change in the official fed target rate, which remains at 4.25-4.5%, but the language and revised economic projections have left some question marks today.
The so-called “dot plot” also remained the same, with the median fed funds target projection showing two cuts this year. This is underscored by the fact that uncertainty regarding the outlook has increased, from not only the continued lagged effects of higher interest rates into 2024 but the policy vortex created by Trump.
The whisper of stagflation comes straight from the Fed’s revised projections. For 2025, it now sees U.S. real GDP growth of 1.7% versus the previous estimate of 2.1% and it has lowered its projection for 2026 to 1.8% from 2%. The unemployment rate estimate rises a tenth of a point this year to 4.4%. In terms of CPI inflation, the Fed now expects 2025 to come in at 2.7% versus its prior call of 2.5% and has lifted its core inflation estimate from 2.5% to 2.8%.
This meeting was supposed to be a snore burger for the markets. No change in rates, no major shifts in the forecast and language that allowed the Fed to steer clear of all the noise and volatility over recent weeks. Instead, the statement has left investors somewhat confused. One might think that the downgrade to the economic assessment would suggest that Fed officials are going to be more dovish. They did in fact cut back on the amount of balance sheet run-off (quantitative tightening) to $5 billion/month from $20 billion.
On the other hand, if you are speaking about lower growth, but leaving the expected number of rate cuts the same and lifting the inflation forecast, then this could be viewed as a hawkish result today. The median dot of a 3.75-4% range by year-end reflected the view of 9 of the 19 officials. Four of them felt that only one more rate cut would be required, and four believed that there should be no further cuts. There were more holdings to these two latter projections than at the last meeting.
Chair Powell’s press conference didn’t offer a lot more clarity as to the direction policy will take. He did repeat that the U.S. economy remains solid, even though recent consumer and business sentiment survey results have deteriorated sharply since Trump’s tariff folly. If hard data between now and the May FOMC meeting were to align with these surveys, then I would expect the messaging to be less ambiguously dovish. For today, even with the implicit stagflation projections, equities stayed upbeat. This could change depending on White House tweets over the remainder of the day.
On behalf of the Pyle Wealth Advisory team, have a wonderful rest of the week.
Andrew Pyle
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