Maximum Pressure For The Federal Reserve

By Dr. Duru of Inflation Watch

Friday, March 14, 2025 3:30 PM EDT

Image source: Wikipedia

Investor expectations for rate cuts are rising. Consumer’s inflation fears are rising while sentiment and employment expectations are sinking. Going forward, the Fed will face maximum pressure trying to implement monetary policy amid this swirl of stagflationary signals.

As the stock market has careened into a bear market amid growing economic anxieties and uncertainties, financial markets have started to return to the old standby to save the day: interest rate cuts from the Federal Reserve. Expectations have definitively brought forward the timing for the next rate cut from July to June. The table below the chart of the market’s target probabilities for the June Fed meeting show the change in probabilities starting one month ago. The odds for the Fed maintaining its target rate range at 4.25% to 4.5% have plunged from 49.6% a month ago to 18.3% a week ago and 18.8% yesterday. While those odds moved slightly higher to 23.1% as of the time of writing, the odds for a 25 basis point cut still increased from 56.2% to 58.1% from yesterday to now.

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Of course, if the market continues to roil and sink deeper into a bear market, financial markets may become too restless with a June timetable. However, as we saw last year, just the expectation for imminent rate cuts can be enough to keep spirits lifted in financial markets.

Even if the Fed wants to placate markets and play its modern role as market hero, consumer’s rising expectations for inflation should force the Fed to remain patient and measured. March’s preliminary read for the Surveys of Consumers from the University of Michigan showed yet another increase for both short-term and long-term inflation expectations. There is already a definite upward trend in long-run expectations and short-run expectations soared. From the University of Michigan:

“Year-ahead inflation expectations jumped up from 4.3% last month to 4.9% this month, the highest reading since November 2022 and marking three consecutive months of unusually large increases of 0.5 percentage points or more. This month’s rise was seen across all three political affiliations. Long-run inflation expectations surged from 3.5% in February to 3.9% in March. This is the largest month-over-month increase seen since 1993, stemming from a sizable rise among Independents, and followed an already-large increase in February.”

In parallel with the troubling trends on inflation expectations, consumer’s expectations for more unemployment are soaring. Take together, consumers are increasingly fearing a stagflationary economic environment.

Thus, the Fed faces maximum pressure. No matter what the Fed decides or says in next week’s decision on monetary policy, major disappointment and/or jitters are bound to rise from some significant portion of observers. In turn, elevated volatility could remain elevated and translate into more pressure on stock prices. Either the Fed will be taken to task for changing a re-ignition of realized inflationary pressures, or the Fed will be criticized moving too slowly to stave off a recession.

For now volatility is calming down as fears of a government shutdown subside…

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