Stocks tumble after Federal Reserve warns of heightened stagflationary risks
The Federal Reserve has no clue what in the world awaits the US economy, so it kept rates unchanged at a range of 4.25% to 4.5%.
“Uncertainty about the economic outlook has increased further,” the statement that accompanied the decision said. “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”
Stocks initially oscillated in the minutes following the statement, but then the SPDR S&P 500 ETF fell out of bed, turning negative and hitting fresh daily lows.
Economists anticipated that the US central bank would be holding the course at this meeting.
Ahead of this release, traders had been pricing in about a 27% chance of a cut at the central bank’s next meeting in mid-June and giving odds of 62% to a cut on July 30. These probabilities were little changed in the minutes following the release.
“The Fed believes that the US economy is expanding at a solid pace and that labor market conditions are solid even though labor demand continues to cool, hiring rates are low, and average hourly earnings have slowed,” Neil Dutta, head of US economics at Renaissance Macro Research, wrote. “Here is the thing. Labor market conditions have already cooled. What makes the Fed assume this stabilizes on its own? It can’t and won’t, which means a policy response will ultimately be required. Proceed accordingly.”
We’ll be closely watching the press conference to learn how the Federal Reserve is grappling with this conundrum of risks to its inflation and labor market objectives.
