Chapter 1: What is the Federal Reserve's latest policy decision?
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No change in rates, no change in dots, one dissent, but some big changes in inflation expectations. Fed officials see one cut still in 2006 at some point, even though their statement notes that uncertainty about the economic outlook remains elevated. Three members who favored no cuts in this year moved their dots down to one.
The statement goes on to say, the implication of developments in the Middle East for the U.S. economy are uncertain, and the committee remains attentive to risks to both sides of their mandate. They still see one more cut in 2027. Stephen Myron, the only dissenter, he wanted a quarter-point cut this time, and from the dots, we discern that he still wants 100 basis points at some point this year.
The language about future moves remains the same. They still talk about the extent and timing of additional adjustments to the target range. It's the summary of economic projections in which we see a lot of changes. PCE inflation this year is forecast at 2.7%, up from 2.4% in December. Core is also seen at 2.7%, up from 2.5%. Both dropped to 2.2% next year, up from 2.4% in the December SEP.
Core is seen at 2.7% this year. Both dropped back, as I mentioned, next year to 2% in 2028. GDP marked up a tenth in both years, both of the next two years, to 2.4% this year and 2.3% next year. The unemployment forecast remains 4.4% in 2026, dropping to 4.3%. three percent next year. That's up from four point two percent in December.
And the longer run estimate for Fed funds seen as the proxy for the neutral rate rises a tick to three point one percent. Guys, Mike McKee. Thank you, sir. We'll catch up with you a little bit later. Let's start with the price action. We've got equities, then bonds.
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Chapter 2: How do inflation expectations impact the Fed's decisions?
Now, Rich, I know the word transitory is banned and they can't use it anymore, particularly in the news conference, but does this scream transitory? Well, it certainly screams we need a synonym for it, temporary, not long-lived. You know, they could justify it perhaps by looking at the oil futures, which still show this as dissipating over time.
But the short answer is nobody, including the Fed, knows. This is very elevated geopolitical risk, and there are risks on both sides. But the baseline, I agree with your panel, is dovish constructive.
Rich, I'm just wondering how much this is just AI written all over it, how much this is a Fed that is basing their entire assumption on a productivity boom tied to artificial intelligence and the deployment of it through the economy and, frankly, disinflation on its heels. I think there's an element of that, perhaps more so with the incoming chair than some other members.
I think it's also a statement, however, that AI is a support to demand in the economy that to some extent, along with those big, beautiful bill tax cuts, is probably going to offset some of what the drag would be from the oil price increases. But but again, this is a modal or a baseline. And I think certainly internally, we'll we'll hear that there was a discussion of the risk cases as well.
Professor Clarida, when you were at Columbia herding cats, Xavier Salah Martin taught the acclaimed principles of economics. Talk to us about the risk of a demand destruction here. To me, it's extraordinary whether it's war, short term or a more permanent demand destruction. Should that be a legitimate concern of the Fed?
Well, the demand destruction comes simply from the fact that not only oil prices, but energy prices and goods that are intensive in oil and energy will go up, and that will tend to reduce the real incomes for millions and tens of millions of households.
Now, on the other side of that, you have the AI boom, but there is no doubt that this is going to squeeze real aggregate demand the longer the oil shock persists. Check out the price action. Let's go to equities. We're still down by 0.6%. Unmoved. By one, the surface of things looks like a dovish decision from the central bank. Check out the bond market. Similar story.
No big moves off the back of this. The only takeaway, this can change, but the only takeaway for me is there is nothing this institution can do. to drive this market in the face of the shock elsewhere. Jeff Curry of Carlyle said it really well earlier this morning on Bloomberg TV, when Jeff turned around and said, there's nothing the central bank can do about this, you cannot print barrels.
This market is still at the mercy of what happens in the commodity market, and the Fed is not the circuit breaker anymore, because this Fed decision, I would sit here and argue, is fairly dovish, with the exception of the absence of a dissent coming from Governor Waller, is fairly dovish to come out and say the outlook for growth is better. We've revised higher.
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Chapter 3: What changes were made to the Fed's economic projections?
The dodgeball analogy, I think, is a good one. So I think, yes, the Fed is the central banker to the world, but but it's not the main attraction right now. Bob Michael with us with J.P. Morgan as well. What is the, with the tentacles of J.P. Morgan around the world, how is EM doing? I see Philippine peso almost up to 60. You saw Australia raising rates in August. Oh, whoa, whoa, whoa.
We're calling Australia EM. No, I'm not calling Australia EM. Getting you in trouble, TK. No, you know, I'm not calling, I'm watching Aussie EM though, which is a life of its own. Sydney, Sydney watching. Well, yeah. They're early morning, deeply, deeply unhappy with that. But I read all the Neville's shoot, including Town Like Alice.
I want to know, as a central banker to the world, the sensitivities he faces. What does JP Morgan see in the reaction in the currency markets, the reaction in fixed income of EM as the chairman speaks? I think there are a couple of things. One, we felt going through this that the dollar would be the safe haven bid. And we're seeing a lot of that.
We also felt for those who wanted to diversify away from dollar, emerging market FX was the place to go. The central banks in those regions seem to be on top of things. And you had a split between those who are energy importers and those are energy exporters, those that are sitting on rare earth minerals. and other minerals and those who aren't. And I think we're seeing all of that play out.
But I will tell you, our client base still feels under-allocated to emerging markets, both equity and fixed income. We're seeing those allocations continue to come in. I think there's a good tailwind there. You just went along Australia. There you go. Back-to-back hikes at the Emerging Markets Central Bank over at the RBA. See that? Honestly, there's some offended people down under right now.
I'm not weighing in on this one, but I will say, I will say that tomorrow will be really interesting with the BOE and the ECB. There you go. You tell them, Bram. All right. Rich Cloud is still with us. Rich, I want to come to you on an important topic to wrap things up, a really serious one. The future for Chairman Powell. This is not how usually these things play out.
Typically, how this plays out, the chairman knows when his term finishes, he gets a great send-off, he walks away, and he does a $1 million speech in about 12 months' time and has a happy retirement. This feels so different, Rich. Kevin Walsh is ultimately being nominated. We have no idea when the confirmation hearing is going to be.
Bob Michael sat here a little bit earlier and said he thinks the chairman, Jay Powell, is still going to be there by the time you get to the midterms. Rich, how do you think this process is going to play out in the next several months? Well, you're absolutely correct. This is unprecedented, unusual. The handoff is usually pretty smooth and very well telegraphed.
And the difference, of course, now is several fold. One, of course, is the DOJ investigation of Powell that the Fed is pushing back on. In addition, of course, even Warsh getting a hearing is now up in the air. You know, I certainly do expect Jay Powell will stay on and perhaps a meeting or two after Warsh finally arrives. You know, whether or not that's after the midterms, I'm not sure.
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Chapter 4: What does a dissent in the Fed's vote signify?
They've lifted their outlook for inflation for this year, at least, but left the median dot ultimately unchanged, implying one rate cut from this Federal Reserve for 2026. To me, the most interesting takeaway is what you said, which is this market doesn't seem to care, even though this is very much a dovish hold. This actually is news in Fedland.
And yet the market doesn't pay attention because there's another game in town and it's everything else in the world. And some people might say, oh, no, the adults can't control this. They can't step in and save us. And the other people will say we haven't had a free market in a long time. And this is what it looks like. And guess what? It's a welcome, welcome exercise.
And so those two sides of the debate are playing out. You think we've got a free market? Well, I mean, that's the whole thing. Don't get too excited. I'm kind of excited about this. I mean, that's kind of a nice thing, not to have the thumb on the scale all the time and the same story over and over again. It's a change. All right. It's a change. Stephanie Roth of Wolf Research.
I can see how excited you are. You're not alone. I've been waiting for that moment for a long, long time. Major moves, 5% away from all-time highs. Even the Japanese market. It's now exciting. Who knows? They're actually trading the benchmark in Japan now. There's actually traders. Stephanie, I'm sorry. Stephanie Rath of Wolf Research joins us now for more.
Stephanie, we need your reaction to the decision and where you expect the emphasis to be in this news conference. Yeah, I mean, the emphasis is going to be on the reaction function, provided that energy prices end up staying longer. The question is, are they going to end up looking through this or do they ultimately end up having to be dovish as a result because growth will end up slowing?
And our own view is that because the economy is so different today versus 2022, they'll ultimately have to be more dovish as a result of the war in Iran rather than the opposite. Otherwise, it tells you a story of productivity and that growth is actually going to be higher in the future years. But then, you know, nothing else changes.
And the one thing that we didn't talk about or that wasn't talked about yet was was the longer run dot shifting up a little bit. Well, this to me, Stephanie, that I'm really wondering about is how much does a more dovish Fed enable something that looks more like 1970s or more like 2022? And what we saw with inflation and the read through, is that something of a concern for you?
No, because the backdrop is so different today versus, say, 2022. If you look at 2022, the unemployment rate was 3.7 heading to 3.5. Today it's 4.4%. payroll gains is growing at 600,000. Today, they're somewhere between zero and 50,000 on average. The inflation backdrop was different. Core inflation was five and a half. Today, it's three.
So the idea that we're going to have a repeat of 2022 seems like a very low likelihood event. And therefore, that's not something I would expect the Fed to react in that way, because the data probably won't support a reflationary type of environment. Stephanie, given a war, given what oil's doing, John mentions it's 60 to basically 60 to 100 or even higher, we're still slaves to the job market.
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Chapter 5: How do geopolitical risks affect the Fed's outlook?
If you go out to December and look at where December is traded right now, we're close to 80. So we've gone from the 60s to close to 80s on the December contract. And the Federal Reserve has lifted the outlook for growth. What's driving that? I wonder how much momentum they think is in the economy, how much AI and data center spending is going on.
Were they surprised by the Delta earnings and that sales are at a high despite higher energy prices? I think the reality is when you've had close to a 50% hike in energy prices, it's a tax on businesses and households, and they will respond by cutting back some of their consumption. We have the smartest viewers, and I just want to point that out where the viewers just wrote in. We do.
And pointed out that among the members, the actual dots might say one thing, but the risk to GDP downside included 14 members versus eight prior at the December meeting. The risk to the upside was 16 members for core PCE as well as the unemployment rate. that it was up from 12 and 13 members, respectively. So that stagflationary outcome still in the back minds of so many of these Fed members.
They just aren't making this their base case. So I just I don't understand, Bob. And I guess this is my question. Is the reaction function essentially they will hold Pat even in this scenario? Or do you have a sense of what the reaction function is to true stagflation?
Well, the bottom line is the market is just looking through the Fed right here and saying, doesn't make sense, don't get it, don't know what they were thinking. The projections don't make sense to me, but I know where we are. There's a lot of tension still in the Middle East. It's yet to completely play out. I think where we are now is about fair. It can go either way from here.
So it's completely dismissive of the FOMC statement. Hey, Stephanie, before you go, what's the number one question for Chairman Powell into this news conference? Yeah, I mean, the biggest question is going to be provided energy prices are elevated through much of the summer. How are you going to think about the balance of risk? Is this going to be something that you're going to?
you know, look through and do you expect that growth is going to be lower as a result? Or is this something that you're worried about more similar to 2022? And what are the balance of risks in your mind in terms of how this could play out? Stephanie, good to see you, as always. Thanks for jumping on. Stephanie Roth there of Wolf Research to build on the conversation. Diane Swonk of KPMG.
Diane, I'm going to use a quote of yours to ask you the question. A dual mandate or a dueling mandate? What have we got? A dueling mandate, and I think that's a real problem. I think the Fed is this dovish sort of numbers don't add up. I think I agree with that completely. A dovish pause is not what I would expect. I would have expected some people to actually put in rate hikes.
in this meeting, and they didn't. And I think there's a real issue about we saw rate cuts in late 2024 to shore up the labor market. We didn't get any jobs. We saw rate cuts in late 2025 to shore up the labor market. I don't think we're going to get a lot of jobs from those. That brings up the issue is, is the problem in the labor market more structural and systemic than
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Chapter 6: What role does AI play in current economic forecasts?
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But in this limited series podcast, we uncover the darker truth behind his global empire of faith and fear. From Exactly Right and Adonde Media, this is Two-Faced, John of God. Listen on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.