FOMC Recap: Stagflation, Market Positioning, and Trade Ideas

Key Takeaways from the FOMC Meeting:

• Rates Held Steady: The Fed kept the benchmark rate at 4.25%-4.50% for a second consecutive meeting, balancing inflation risks with slowing growth.

• Stagflationary Concerns: Inflation remains sticky, partially due to tariff impacts, while economic growth forecasts have been downgraded. The Fed sees the inflation impact as transitory but uncertain.

• Market Reaction: Equities rallied (S&P 500 higher) and Treasury yields declined, as markets priced in more rate cuts later in the cycle.

• Updated Projections:

  • Growth forecast for 2025 lowered to 1.7% (from 2.1%).

  • Core inflation revised up to 2.8% (from 2.5%).

  • Unemployment expected to rise to 4.4% (from 4.3%) by year-end.

  • Two 25bps cuts expected in 2025, though eight officials see one or fewer.

• Fed Caution & Market Uncertainty:

  • Powell emphasized uncertainty has increased, removing prior Fed language suggesting risks were balanced.

  • Recession risks are rising but not high, with consumer sentiment weakening while economic activity remains stable.

  • The Fed remains data-dependent, awaiting clarity on inflation and Trump’s policy impacts.

• Balance Sheet Adjustment:

  • The Fed will slow its balance sheet runoff, reducing the monthly cap on Treasury maturities from $25B to $5B, citing liquidity management concerns.

  • Governor Waller dissented, favoring a continued runoff pace.

Bottom Line:

The Fed remains cautious, holding rates steady while acknowledging rising growth risks. The market has interpreted this as more rate cuts coming later, with broad risk assets catching a bid and Treasury yields moving lower. However, with elevated volatility and macro uncertainty, positioning should remain flexible, particularly as inflation pressures and geopolitical risks evolve.

Below, we dive into key market reactions, tactical trade setups in FX and rates, and why I remain a seller of rallies in the S&P 500. We also explore the implications of improving market breadth and what it means for positioning in the weeks ahead.