Stagflation Shaken, Not Stirred: Bond's Take on the Fed's Dilemma

A Licence to Cut?

Right so it seems even our friends at the Federal Reserve are facing a bit of a 'live and let die' situation. Stagflation looming like a Blofeld plot with higher inflation unemployment and recession odds all playing their part. According to the CNBC Fed Survey the majority believe the Fed will cut interest rates this year and next. Seems everyone's hoping for a 'goldeneye' on the economy but let's see if they can pull it off without things going 'a view to a kill,' shall we?

The World Is Not Enough (Growth)

Now these 'experts' – fund managers analysts economists the usual suspects – they see the Fed funds rate declining by nearly 100 basis points. Recession odds have surged from a paltry 22% in January to a rather alarming 53%. GDP is forecast at a measly 0.8% this year which let's be honest is slower than a villain's monologue before the bomb goes off. It appears even the Fed can't 'die another day' without addressing some serious economic woes.

Giving Up on 2%? Never Say Never

There’s chatter that the Fed might be 'giving up on the 2% inflation target perhaps permanently.' Some chap named Richard Bernstein reckons so. Fed officials of course are denying this faster than I deny knowing anything about that vodka martini (shaken not stirred naturally). But let’s face it even they must be feeling the pressure like trying to defuse a bomb with two seconds left on the clock.

Trump Card: Tax and Deregulation to the Rescue?

Ah politics. Seems some believe that the 'tax and deregulation policies' will somehow 'return the economy to a better trajectory of growth' by 2026. One can only hope this 'quantum of solace' is more than just wishful thinking. Though I've seen enough smoke and mirrors in my career to know when someone's trying to pull a fast one.

The Stock Market: Overpriced or Undervalued?

Equity prices are all over the place darling. Overpriced undervalued who knows? These 'experts' are saying most likely there are further declines ahead. Markets not priced for a recession? Oh I’ve seen more realistic villains in children's cartoons! Optimism remains too high.

Tariffs: A Licence to Kill Growth?

And here's the real kicker: tariffs. A whopping 63% believe across the board 10% tariffs will remain on all U.S. imports. Strong majorities see these as bad news for growth employment and inflation. Tariffs should have been sequenced post tax cuts so the negative shock was following a positive shock one of the blokes from MetLife Investment Management states. A 73% majority say the combination of the administration's tariff immigration and foreign policies have damaged the U.S. brand in a way that is negative for the image of companies overseas. Another 83% say they are a negative for the attractiveness of U.S. assets. I would have to agree.