Uncertainty is Fed’s favourite word, analysts flag ‘stagflation lite’ concerns

The U.S. Federal Reserve has kept the federal funds effective rate unchanged at the 4.25-4.5 percent mark in the June meeting

Ask U.S. Federal Reserve Chairperson Jerome Powell his outlook on inflation, growth forecast, his stance on the labour market, or rate cut expectations and he will give you the same answer: uncertainty is prevalent, and the outlook depends entirely on incoming data.

The U.S. Federal Reserve's Federal Open Market Committee (FOMC) has kept interest rates unchanged at 4.25 percent to 4.5 percent following the June 17-18 meeting; the central bank maintained the same level since December 2024 amid ongoing geopolitical tensions and trade-related volatility.

Regarding the outlook for the year, even the Federal Open Market Committee sees significant division in the rate cut trajectory for 2025. According to the Summary of Economic Projections, the document that showcases the FOMC members’ expectations on monetary policy, inflation projections, and growth outlook, seven FOMC foresee no cuts for the year, while eight are pencilling in two cuts of 25 basis points each.

However, analysts concur with the unprecedented uncertainty regarding the global economic and trade outlook. Further, they added that Powell's commentary lacked clarity.

Domestic brokerage JM Financial said, “Confusing statements from Powell like ‘inflationary impact of tariffs can be one-time or it may persist depending on the size of tariffs’ and ‘uncertainty regarding tariffs have diminished but still at elevated levels’ indicate the extent of uncertainty on the tariff policy even within the Fed.”

Subho Moulik, CEO at Appreciate said, “The Federal Reserve's decision to hold rates steady while projecting a 'stagflation lite' scenario of 1.4 percent growth and 3 percent inflation reveals a central bank navigating unprecedented uncertainty.”

Madhavi Arora, economist at Emkay Global, noted that even though the Federal Reserve maintained status quo, the tilt was hawkish, indicating that policymakers expect a tariff-led stagflationary scenario in the US this year.

Outlook

The Fed is likely to wait for meaningful signs of weakness in the labor market before acting, which implies that the next cut may only arrive in September. Market pricing also reflects this, with pricing for a cut at ~63 percent, while July is at only ~10 percent, added Arora.

JM Financial believes that robust growth combined with elevated inflation would push the rate cut expectation closer towards the year end, however it is important to wait for the tariff policy to be finalized. The key monitorable going forward would be whether the tariff deadline (July 9, 2025) is met or is it postponed further.

For Indian investors looking at US stocks, the current Fed stance and market volatility present both risks and hidden opportunities, suggested Moulik. “Small-cap US stocks, in particular, stand out as a hidden gem: historically, they tend to outperform large caps following the end of rate cycles, especially in soft-landing scenarios, and their domestic focus makes them less vulnerable to global trade disruptions and tariffs.”

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