March 20, 2025 - 1:00pm
On Wednesday the US Federal Reserve Board announced that it would hold interest rates, with a target in the range of 4.25-4.5%. Though the Fed expects to cut rates another couple of times in 2025, it also noted that America’s outlook has changed — which is bound to complicate the path ahead.
By predicting slower growth than previously expected, but higher inflation, central bankers are warning that the economy could slide into stagflation. That, as it happens, is the view of an increasing number of economists, who believe that the Trump administration’s volatile policymaking and use of tariffs could damage the American economy.
Of course, this very volatility makes forecasting even more difficult, but for now the Fed seems willing to give the administration the benefit of the doubt. At the press conference following the meeting, Chairman Jerome Powell was goaded by journalists into saying that the inflationary impact of tariffs could prove transitory — that dreaded word which hasn’t aged terribly well, since it’s also what he said about pandemic inflation.
But given this appearance of equanimity, investors interpreted the announcement as dovish, driving up prices of both stocks and bonds — the effect of the latter being to reduce interest rates on long-term debt. This reaction was a bit puzzling. For bonds and stocks to rally simultaneously in the absence of a clear sign of policy loosening is unusual. The former would suggest bond investors foresee a recession, and thus a fall in inflation; the latter suggests stock investors foresee a resumption of growth. Given that US stocks remained priced for close to perfection, with expectations of earnings presuming continued strong economic growth, one of these narratives will have to give before long.
This is because the Fed did not in fact signal an imminent loosening of monetary policy. On the contrary, the dot plot of the expected rate decisions of individual governors revealed that, if anything, the central bank has become more concerned with inflation, and may be more likely to tighten — rather than loosen — policy in the months ahead.
Although inflation has yet to turn upwards significantly, core inflation has not returned to the Fed’s target range and doesn’t look likely to do so anytime soon. Meanwhile, consumer and business surveys reveal expectations of sharply higher inflation in the months and years ahead. At the moment, a slowing economy is keeping the job market weak, so workers have been reluctant to demand pay increases. But given that labour-supply growth is slowing, due to Donald Trump’s tightening of immigration controls, any economic upturn will almost certainly result in wage inflation.
In the coming months, one of two things is therefore likely to happen. Either the economy picks up speed, raising inflation with it; or it loses speed, knocking down share prices. It’s quite possible, too, that not all Fed governors share Powell’s belief that tariffs will have only a passing inflationary impact. Indeed, given the Fed Chair’s patchy record of prognostication on this topic, caution would be advised. Inflation may yet rise as growth slows, which would be bad for both stocks and bonds.
In short, this rally may have legs, but it would take a brave soul to assume the bear market in US stocks isn’t happening soon. Anybody looking to buy into the rally should bear in mind a well-honed piece of financial advice: caveat emptor.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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Subscribe“ In short, this rally may have legs, but it would take a brave soul to assume the bear market in US stocks isn’t happening soon”
Rally? A two-percent two-day up move after a ten-to-fifteen percent down move (depending on which index you follow) is nobody’s idea of a rally.
All parochial and irrelevant if Xi starts to blockade Taiwan (or more likely declare a series of custom checks on all shipping in and out of Taiwan). The bellicose language out of Beijing should be troubling the markets much much more, and probably would but for Trump’s distracting chaos elsewhere. They are certainly not cowed by Don J’s bluster and they are sensing he won’t fight for Taiwan. 2027 Xi promised. It’s coming up fast. A massive worldwide economic shock on it’s way. And to try and deter this what does Trump/Vance do – yep naff off all US Allies.
Can we just stop all these articles speculating where the stock market is going? No-one actually knows and Rapley’s views are no more valid or interesting than mine.
GOLD!!!!!!
about $3050.00/oz. Three thousand seems to be the ‘floor’ lately, Wow! I recall last October it went down to $1650. If this is a canary it is saying the global economic paradigm is changing. Not that it can survive AI either. I worry my stash could lose value down to nothing as AI looks at every geological map and data and finds a vast ‘Motherlode’ of a million tons of it for the robots to mine for next to nothing.
Where is it going?
‘On one hand things may get better, but conversely, they may get worse’. Say’s Unherd Market Analyst.
‘See, it’s like this, Tariffs may hurt the economy, but maybe not, and inflation may get worse, or not, depending. Then they may cut interest, but no one knows yet, and either way it will affect things, but no one knows what that will bring for sure’, he went on to say
OK… got it, But…. ”AI Agents”, if you do not know them, basically individual code or programs built on LLMs (Chat) which specialize in individual jobs. Say Canadian Contract Law, or Podiatry, or soils structural foundation engineering. Because these are trained on this specialty they suffer from no ‘hallucinations. They can also be stacked on each other, and they learn.
A top $Billionaire developer of them says 3 – 5 years and the Professionals will be dinosaurs, mastodons walling in the La Brea Tar Pits to their doom, going extinct. Today’s Daily Mail says a big group of fast food restaurants are now to use Chat to handle drive through orders due to the $20 minimum wage….
This is the story, we are to lose our jobs, and they will go from the top down, opposite to what people expect. Till they figure out to tax LLM Chat and give that to the Doctors now unemployed, well…. the global economy is toast.
P.S. as the farm tractors will all be self driving shortly, there will be enough food, so that is good news anyway.
AI may actually break the labor driven economic model that has prevailed since the Industrial Revolution. In those times, the discovery and colonization of new lands, advances in farming, and the steam engine combined to produce an agricultural surplus and a need for non agricultural laborers, creating the modern labor based economy and essentially rendering the old mercantilist system based on land completely obsolete. We could be witnessing the next turn of the wheel.
What will drive this new system you ask? Energy of course. Energy to run all those AIs and robots. In this world, energy is everything, and every source of energy that we can harness is valuable. Investing in new sources of ‘green’ energy such as wind and solar is thus an absolute good that I support wholeheartedly. Finding other green sources of energy is also money well spent. It ultimately won’t matter what color it is. Energy is energy, and it when labor is no longer a driving factor, the nations of the world will get serious about competing for it and rationing its use for their own people. This might be the true death knell of open borders. Nations all over the world will close ranks and protect their own.
In this new energy economy, drilling for more fossil fuels is… also good, because global decarbonization isn’t going to happen. Americans and Europeans are balking at the costs of decarbonizing their own economies, and elites and climate experts also were expecting to subsidize the decarbonization of the ‘global south’. If they can’t sell the former to voters, the latter is out of the question. The number of Americans cheering for the dismantling of USAid should give you some idea about how the taxpayers feel about having their tax dollars being handed out to foreign governments or spent on foreign nations. Maybe the Chinese will fund all that as they don’t have to worry about those pesky voters, but given how many coal fired power plants they’re building and how much Russian oil they’re buying, I kind of doubt it. To say that decarbonization is politically unsustainable is greatly understating the matter.
AI could change civilization in a way that’s only happened a few times in human history. What people will then do for jobs, income, and how the free market economy will work, I honestly have no idea. My guess is that we’ll all be forced into some kind of hybrid system where core drivers like energy, raw materials, food, and critical supplies are closely managed by the government and subsidized to the extent necessary while most people are just given a UBI and then spend it on whatever, leading to a continued consumer economy driven by innovation and and entrepreneurship.
But given that labour-supply growth is slowing, due to Donald Trump’s tightening of immigration controls, any economic upturn will almost certainly result in wage inflation.
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Wonderful term! Now, when wages of hired workers will grow, analysts will call it wage inflation. The main thing here is to use the scary word inflation!
I remember a lady who hates Trump complaining during his first presidency that she now had to pay her gardener more. The term wage inflation was not invented yet.
It’s amazing isn’t it how increases wages are portrayed as a bad thing!
A strange paradox in neoliberal thinking is that if wages stay low we’ll somehow all be better off
Not everyone’s included in the ‘we’, and those deplorables certainly aren’t.
Excellent point. Also of course the exact reason many of Trump’s voters did in fact vote for him.