Fed Warns of Stagflation and Has No Idea What Will Happen Next
The Federal Reserve waned that the risks of unemployment and inflation have grown as Trump remains unpredictable.
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It was another very chaotic market session on Thursday that started on a positive note when Treasury Secretary Bessent announced he would be starting talks with China over the weekend. The spike didn't last long as President Trump indicated that he was unwilling to cut the 145% tariffs he put into place, and Bessent talked down expectations by stating that they were at a very preliminary stage. The bottom line is that a deal will be very difficult and won't happen for a while.
Attention then turned to the Fed, which disappointed the market with a blunt statement that "The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen."
This is essentially the definition of the worst of all economic maladies: stagflation. The main reason that there wasn't a worse market reaction is that Powell commented that, while risks of inflation and unemployment have risen, those outcomes haven't yet materialized. There is no data yet showing that this is happening, but tariffs have increased the risk substantially.
Fed fund futures indicate that traders are still anticipating three Fed rate cuts this year, which indicates that they are more worried about unemployment than inflation. If inflation were the primary problem, there would be no rate cuts, but if economic growth is the issue, then rate cuts are the remedy. If both are a problem, then the Fed is stuck without much of a remedy.
Basically, the Fed has no idea what will happen, so it is doing nothing until it has more data. However, the risks of negative developments have risen due to tariffs and trade turmoil. This is not a market-friendly situation with the Fed admitting it has no clue what might happen.
Late in the day, another headline hit, indicating that Trump was repealing some restrictions on sales of U.S. semiconductors for use in foreign AI. Chips spiked on the news and lifted the market, but it only lasted a few minutes.
At the end of the day, the indices were positive, and breadth was running 5,600 to 4,100 decliners. That is a solid performance in the face of an unfriendly update. We'll see how the Fed news is digested overnight, but this market continues to show signs that it wants to embrace an optimistic narrative regardless of the negatives that are thrown at it.
Have a good evening. I'll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
