The Fed Put Loses Its Power: A New Era for Monetary Policy
Key Takeaways:
- Persistent inflation is impacting The Fed’s ability to take swift action as in the past
- The Fed is stuck balancing weaker growth and labor markets against rising inflation forecasts
- Fed Chair Jerome Powell is expected to maintain a cautious stance and avoid premature rate cuts
From the desk of StoneX Senior Advisor Jon Hilsenrath, the Fed finds itself pressed against the constraints of its power amidst an ongoing period of inflationary stresses. As Chairman Jerome Powell navigates a critical period for policy, the central bank faces tough choices that could redefine its role in stabilizing markets and managing economic shocks. This article explores why the Fed’s safety net has weakened and what that means for the outlook ahead.
The End of an Era: Fed’s Limited Response Capacity
Hilsenrath posits in his report that tor over two decades, traders found comfort in the so-called “Fed Put” — the belief that the Federal Reserve would step in to support markets during periods of economic stress by cutting short-term interest rates. This safety net was supported by secular stagnation and China’s role as a deflationary export engine, which kept inflation subdued. In his view, this in turn freed up the Fed to focus on maximizing employment and stimulating growth without the constant threat of inflation.
However, this paradigm has shifted. The Federal Reserve now faces a dramatically different landscape, constrained by stubborn inflationary pressures. As the Fed updated its economic and interest rate projections, it has found itself with limited flexibility to aggressively combat slowing growth, signaling the diminished potency of the Fed Put.
Expectations for the Fed’s Next Move
Hilsenrath currently expects the Fed to maintain its cautious stance, with incremental adjustments to the outlook on interest rates. According to Hilsenrath and StoneX’s Strategy Team, the latest "dot plot" was expected to show a slight upward revision to individual rate forecasts. While the consensus still leans toward two quarter-point rate cuts in 2025 — bringing rates just below 4% — the internal debate is intensifying. Some Fed officials may call for just one cut or even none at all, while others could increasingly get talked down from advocating for three or four cuts to a more moderate two.
Chairman Jerome Powell is expected to maintain the “wait-and-see” approach, underscoring the high degree of uncertainty in the economic outlook. With ongoing ambiguity over U.S. trade, fiscal policy, and inflation dynamics, Powell is likely to sustain a call for patience, echoing remarks made earlier this month: “We do not need to be in a hurry and are well positioned to wait for greater clarity.”
A Bleak Summary of Economic Projections
The Fed’s updated Summary of Economic Projections has also been a focal point in gauging the bearings of the central bank going forward as monetary policy is maintained on a steady course. Growth, inflation and employment forecasts create a difficult combination for the group.
Ordinarily, unfavorable forecasts for growth and employment would justify an easing of monetary policy. However, inflation expectations are simultaneously on the rise. This complicates the central bank’s calculus, as cutting rates amid a escalated inflation outlook would jeopardize its hard-earned inflation-fighting credibility.
Powell Must Draw on History
Powell now faces a complex economic puzzle, according to Hilsenrath, reminiscent of the early 1990s when then-Chairman Alan Greenspan moved cautiously in response to a looming recession due to persistent inflation and geopolitical shocks like Iraq’s invasion of Kuwait. Powell, who worked at the Treasury during that period, is well aware of the challenge posed by hurdles such as these.
In this volatile environment, Powell’s strategy hinges on distinguishing signal from noise. As he noted earlier this month in Chicago, separating temporary disturbances from structural shifts will be crucial in shaping the Fed’s response.
Balancing Act Amid Mixed Signals
Despite market anxieties, Powell is likely to downplay the immediate risk of recession. While business and consumer confidence have softened, private-sector hiring remains robust. Similarly, while short-term inflation expectations have crept upward, long-term inflation expectations appear stable. Powell’s messaging will aim to anchor these longer-term expectations by steering clear of premature rate cuts.
Ultimately, the Fed appears poised to adopt a cautious, data-driven approach, opting to “wait for greater clarity” before taking decisive action. The central bank is keenly aware of the reputational risk it faces if it moves too quickly to support growth at the expense of inflation control.
Conclusion: A Fed on the Sidelines
For now, Hilsenrath believes that the Fed is not riding to the rescue. In stark contrast to the past two decades, the central bank finds itself constrained by inflationary realities that make aggressive easing untenable. As Powell and his colleagues navigate this new era of policy trade-offs, market participants will have to adjust to an environment where the Fed’s safety net is no longer as reliable —or as powerful— as it once was.
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--- Written by Alex Mednick
--- Expert: Jon Hilsenrath, Senior Advisor
