Markets disappointed with the halfway Fed pivot
Honest Fed reality check on the business cycle (but still in denial on labor data)
- We were hoping for a full pivot to open the door towards easing again, however, we characterize this Fed event as only a slight pivot (neutral to slightly dovish). On one hand, the SEP is more realistic with the Fed now downgrading GDP and lifting unemployment rate expectations (as we expected) to 4.5% for both ‘25 and ‘26. Most importantly, they kept the optionality of cutting 2 times in 2025 (also as we expected). However, on the slightly hawkish side, the SEP had one less cut in 2026. Chair Powell also still sounds more concerned about future inflation and the potential for an un-anchoring of inflation expectations due to tariffs (which is inconsistent if tariffs are considered a one-time price shock).
- We continue to believe the Fed is under-estimating the weakness in the economy that was present before the tariff shock, specifically, almost ignoring the cracks that have been visible in the labor market for years.
- We maintain our view that the longer they wait to ease, the more they may need to do. For now, we are data dependent and monitoring how conditions change over the summer before making any tweaks to our Fed forecasts. We still think the Funds rate is 100bps too high.
