FOMC: stagflation > higher for longer?

Paid subscriber analysis

The FOMC, as expected, didn’t cut interest rates, and they didn’t change the cut projections for 2025. We said this was to be the most likely scenario, and it’s what happened.

However, at the same time, the projections signaled a more hawkish Fed than expected.

GDP growth projections were revised down to 1.4% for this year (down from 1.7 in March and 2.1 from December). Inflation on the other hand was revised *up* to 3% on PCE and 3.1% on the core (up from 2.7 in March and 2.5 in December). The Fed is therefore expecting inflation to resurface, which explains why they do not anticipate more rate cuts this year or the next one, despite all the pressures from the Trump administration. The Fed seems to be gearing towards stagflation (declining growth, rising inflation), which is not ideal for equities or bonds. This is still *not* a stagflation, clearly, the data needs to show this consistently, and currently it’s not. But it *is* a notable signal that the Fed is more worried about the economic outlook this year, however not enough to cut rates, but rather to keep that famous line in the sand of the past two years: “higher for longer”.

In terms of the actual dot-plot, the positions were unchanged for 2025, but a few more members were more hawkish for 2026 and 2027.

Powell doubled down on this during the presser, saying he expects a “meaningful increase of inflation ahead”, and was objectively more hawkish than usual in his view on maintaining rates high. He was also not optimistic on tariffs (hardly surprising), and he maintained that the labor market is strong enough and does not warrant a rate cut just yet.

Will be very interesting how the administration reacts to this. They will not be happy, that’s for sure.