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Tariffs & Transitory: Insights from the Latest Fed Meeting “Inflation can be volatile month to month, and we do not overreact to one or two readings that are higher or lower than anticipated.” — Fed Chair Jerome Powell
In the Fed’s latest meeting, they left interest rates unchanged at 4.25%-4.5%. But what mattered more was what he said. The stay-the-course tone was well-received by the market, with the battered S&P 500 up 1.1% at the close. The Fed left interest rates unchanged, as expected, but signaled two rate cuts were on the table even with the possibility of tariffs causing inflation. It’s my opinion that the Fed may be viewing inflation as transitory, which, given its history with “transitory,” is a little scary. The S&P, as Powell was speaking
What about stagflation?
Stagflation is where the economy slows, but prices still climb — not a great place to be. The worst of both worlds! The problem with stagflation is that it does not exist naturally, at least not for very long. If demand falls, eventually, so do prices… makes sense, right? Unless (there is always an unless) there is an external force, like the price of oil in the 70s or tariffs. It can be appropriate to look through inflation…. if it is transitory – Fed Chair Jerome Powell
What makes tariffs different is they are often a one-time event. A 20% one-time increase is painful, especially for an already-weary consumer, but that is it. It’s over. Inflation is 20% one year and back to normal the next. The Fed and investors may view that as transitory and less harmful. Could tariffs cause a recession?
“The Federal Reserve is well-positioned to wait for greater clarity before making any adjustments to interest rates.” — Fed Chair Jerome Powell
Yes, in my opinion, if something bad were to happen, it would not be stagflation, but tariff uncertainty causes companies and consumers not to act, not to hire, and not to buy. Recessions are a part of capitalism; like part of having a dog is them wanting to go in and out for no reason, you can’t have a free market economy without a recession. Tariffs could push an already slowing economy over the edge. They could make a shallow natural slowdown into something worse. And given what a large employer the federal government is, the DOGE layoffs could contribute to a slowdown, too. Is there hope? “We remain confident in the economy’s resilience, even as we navigate through uncertainties.” — Fed Chair Jerome Powell As Powell points out, the economy is still strong. And if the Fed does do two rate cuts this year, it could offset the weight of tariffs on the economy. There could be a “Fed Put” to prop up a still good economy. Recessions are tough to predict. We were all 100% sure we would have a recession when the Fed hiked in 2022; we even had the tell-tale recession sign, the inverted yield curve. What does this mean for you?
Well, interest rates on things like credit cards are not going down right away, maybe later in the year. Mortgage rates are less directly tied to the Fed rate, but those will probably stay closer to 7% than 6%. It also probably means more volatility for your 401k. The market’s initial future rate-cut happy dance could keep going, but a trading range is more likely. Also, once Q1 earnings come out, the Fed Put could have trouble keeping the market up if the tariffs start to take their toll on earnings. It might prevent a large drawdown, but as we have talked about, 10%-15% market drops are fairly common on a multi-year basis. If the Fed cuts to normalize, that is good. If the Fed cuts because we are headed to a recession, it is not so good. It may work but it is a balancing act..tough to do! Strategy vs. Tactics Trust your plan & Stay diversified The reason we plan is so that we cannot only manage through uncertain times but take advantage of them. If we knew the future, financial planning would not be a profession. Financial planning is about making informed decisions about possible outcomes with an uncertain future. Any changes in your core asset allocation should be small. Tactical, not strategic. You chose a long-term strategy for a reason. A strategy takes into account that recessions happen. It is why we have fixed income and emergency funds. Any change in equities should be within a risk-return range or tilting toward equity sectors that may perform better during a recession or assets that pay a higher healthy dividend. If the tilts are too large, you are betting not investing. You might get lucky, but eventually, you will harm your plan. Dramatic strategic moves should only be made if a major personal change happens, like an early retirement or a severe illness. Your strategy is like plotting a course for a long journey, and your tactics are the day-to-day adjustments you make based on road conditions, weather, or other obstacles. Both are essential, and successful investing requires balancing them carefully.
If you don’t have a plan and would like to get one, schedule a Discovery Meeting:
To health and wealth! Mark Struthers, CFA, CFP®, CRC®, RMA® For current clients looking for a meeting:
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