Fed held rates steady, dot plot shows potential for two cuts, inflation forecast raised for 2027, Powell uncertain about Iran war impact.
Speaker1
Powell committed to staying through investigation, would serve as chair pro tem if successor not confirmed.
Speaker2
Introduces Kelsey Barrow from JPMorgan, notes similar views on Fed mandate being more difficult with no private sector job growth and elevated inflation risks.
Speaker2
Asks if Kelsey still believes next move is cuts, not hikes or staying pat.
Speaker2
Kelsey Barrow
Yes, that is our view. We're facing likely the largest energy shock since 70s/80s. Powell said throw out forecasts; focus on balance of risks: 16/19 see upside inflation risk, 16/19 see upside unemployment risk.
Kelsey Barrow
Yields moving higher due to first-order energy impact (higher inflation breakevens). Market hasn't calculated second-round growth impacts. Last year with tariff shock, Fed stayed on hold but weaker labor market won out and Fed cut.
This situation could be both inflationary and impact growth. You think risk weighted to growth side. Notes 2-year inflation swaps up but still below Ukraine war levels.
Speaker2
Kelsey Barrow
Starting point crucial: inflation much lower today (2.5% vs 7% in 2022), nominal GDP 5% vs double digits, real policy rate modestly restrictive, fiscal less restrictive. Shouldn't respond same way as 2022.
Argument against cutting: nowhere near 2% inflation, might not get there by end of next year. Do we throw out 2% target?
Speaker1
Kelsey Barrow
Can't throw out 2% officially. Fed worried about jobs. Watching inflation swap market, especially longer-term expectations which remain anchored. 10-year Treasury yield around 4.25%, same as before shock started - a signal.
Is 10-year yield signal of inflation expectations or growth expectations?
Speaker1
Kelsey Barrow
Combination: markets think this will be somewhat short-lived, AND near-term impact is higher inflation but medium-term impact is weaker growth.
Don't want to overreact to daily news. Market down 4% from highs.
Speaker2
Kelsey Barrow
Agree, don't want to overreact. Ultimately focus on fundamentals and valuation.