The Fed conjures a bad memory, plus an earnings season preview.
One of the most terrifying horror movies I ever saw was in the early 1990s, called “Candyman.” The film followed the premise that saying the name Candyman five times in front of a mirror summons this vengeful spirit, who then appears in the reflection to slay the summoner in some horrifying way. And yet, people still dared to say the words, and a horror classic was born.
It reminded me of Federal Reserve Chair Jerome Powell this week, who somehow thought it was a good idea to stand in front of the press corps following a two-day interest rate policymaking meeting and use the same spooky expression he did back in 2021 when inflation first rose past the Fed’s 2% target.
Back then, Powell and his colleagues repeatedly said they expected inflation to be “transitory,” reasoning that it was brought on by Covid-specific factors impacting supply and demand that ultimately would fade. However, inflation kept rising, eventually hitting 9% in June 2022 (as measured by the consumer price index), and the Fed was forced to respond with a series of aggressive interest rate hikes at a pace last seen in the early 1980s.
When asked about tariffs and the impacts on inflation following the Fed’s decision to hold interest rates steady at a range of 4.25% to 4.50%, Powell invoked the same “transitory” language when he responded by saying, “It can be the case that it’s appropriate sometimes to look through inflation, if it’s going to go away quickly without action by us, if it’s transitory. And that can be the case in the case of tariff inflation.”
Federal Open Market Committee officials indicated that two more quarter-percentage-point rate cuts (0.25%) could be on the way this year, though Powell cautioned the Fed is not locked into that course, nor will the transitory inflation view on tariffs endure if the data changes.
“We will be watching all of it very, very carefully. We do not take anything for granted,” he said.
President Trump weighed in with a post on Truth Social arguing for the Fed to cut interest rates to ease what he is describing as the “transition” of the American economy. “A little disturbance,” “a period of transition” and “a detox period” have all become phrases that Trump and his administration have used to describe the economy, as the stock market has grown increasingly volatile in response to one tariff announcement after another. However, the administration is adamant that the newly levied tariffs will ultimately bring revenue, jobs and factories back to the U.S.
As the market calibrates to the policy decisions of key leaders like Trump and Powell, there is no question that it is smelling a whiff of the stagflation bogeyman (or Candyman). Stagflation is a period characterized by rising inflation and slowing or no economic growth and is often accompanied by rising unemployment. It brings people back to the 1970s oil crisis, when there was a bear market for stocks from January 1973 to December 1974.
We have a long way to go to get anywhere near the kind of conditions that characterized the 1970s, but even the hint of those conditions is making investors uneasy. Companies are increasingly citing confusion and uncertainty around their planning, capital spending and hiring decisions. FedEx is a prime example—its leaders cut its earnings outlook due to “weakness and uncertainty in the U.S. industrial economy.” Nike echoed that sentiment by saying it would miss analyst expectations for sales this quarter because of tariffs and falling consumer confidence.
We have a few weeks to go before the next earnings season, when markets will get concrete information to trade on. For now, growth-positive policy changes like tax cuts, deregulation and lower interest rates are not in open discussion and are not a catalyst for markets. As such, until some of these growth headwinds are reversed or tempered by other positive policy changes, or monetary policy is loosened once again, we will likely be at an impasse. However, the transition from a government-heavy economy to one that is more privately driven should ultimately be better for many stocks. This path is going to take time to travel and is unlikely to be smooth.
With that, our work to review the quality of your holdings, the balance and diversification of your portfolio, and to make sure the liquidity you need for spending and living are provisioned appropriately is ongoing. The makings of an enduring portfolio and relationship are rooted in the ability to weather any periods of transition or transitory circumstances that come our way. We are always here to help you do just that.
If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).