Following the Federal Reserve’s March policy meeting, “stagflation” has become one of the most talked-about concerns in global financial markets.
While the Fed announced on March 19 that it would keep interest rates unchanged at the 4.25%–4.5% range, its latest economic projections sent mixed signals: growth expectations for 2025 were revised downward, while forecasts for both inflation and unemployment were revised upward.
Against the backdrop of sweeping policy shifts under the Trump administration — including aggressive tariffs, tighter immigration enforcement, and large-scale federal workforce cuts — Fed officials acknowledged that the U.S. economy stands at a crossroads marked by heightened uncertainty.
This early warning of a potential stagflation scenario is not unfounded. Although the dot plot still shows the possibility of two rate cuts this year, a growing number of Fed officials are adopting a more cautious stance: eight FOMC members now forecast only one or no rate cuts in 2025, up from four in December.
At the post-meeting press conference, Chair Jerome Powell admitted that “policy turbulence” under the Trump administration has raised uncertainty for both consumers and businesses — with tariffs being a major driver behind the upward revision to inflation expectations.
“We need clearer evidence of economic weakness or inflation returning to target levels before considering rate cuts,” Powell said. While the labor market remains strong, with unemployment holding steady at 4.1%, he acknowledged that “consumer spending is slowing and household uncertainty is rising.”
In light of these developments, Southern Finance spoke with Richard Roberts — former Head of Risk Management at the Federal Reserve Bank of New York and a veteran of over 20 years in the Fed system. Roberts offered a deep dive into key topics, including the reliability of the dot plot, inflationary pressures, consumer sentiment, potential liquidity risks in the banking sector, and the dangers of political interference in central bank independence.
Southern Finance: The Federal Reserve had decided to keep the rates unchanged. However, at the same time, they revised the GDP growth forecast downward while raising the inflation and employment forecast projections. So do you see this as a shift, as an early sign of stagflation? And how should investors interpret these mixed signals?
Richard Roberts: It's a great question. First, let me turn to the SEP. For a long time, I've argued that these dots that come out of the SEP can be very misleading, particularly against the backdrop of something like an exogenous event, such as in this case, Trump tariffs or threat of tariffs.
And so what do we have this time? We have a series of 19 dots from the 19 FOMC participants. And we don't know the foundation that those estimates were provided against. What were their assumptions? When did they provide these estimates? A lot's been changing recently. So it's a big muddle.
I don't put too much faith into the dots of the dot plot. However, putting those issues aside, I would say that the message of the Fed, at least with the dot plot and the policy statement that was issued up front on Wednesday, was a stagflation message. We saw growth bump down.We saw inflation bump up. And we saw unemployment bump up. So I would say up front, it seemed to be quite a stagflation message.
However, on the backside, at the chairman's press conference, I would say, Chair Powell tends to have some dovish inclination to him. And that inclination came out in his press conference. So the message up front was stagflation. On the back end, it was, don't worry, inflation's under control. We think expectations are okay. So it was a mixed bag. It was a mixed bag.
Southern Finance: Yes, speaking about the divergence, we saw there is a sharp divergence in the Federal Reserve's policymakers' rate projections from the dot plot. So what does this internal division suggest about the Federal Reserve's confidence in its outlook? Also, how should investors interpret this kind of uncertainty and divergence among different policymakers?
Richard Roberts: Look, my opinion is we should all get away from this belief that economists are these hard scientists wearing white lab coats in the laboratory with precision of estimates.
Economists are social scientists, and the best they can do is some general range of a projection. So I wouldn't get too jumpy either way about the movement in those dots, because even as, particularly in an ever-changing environment, as Chair Powell said during his presser, he so much said these, it's very tough to predict in today's environment, and these predictions aren't worth that much. So I'll take him at his word for that. Don't put too much strength in the estimates of the SEPs.
Southern Finance: So based on your projection, how many rate cuts will there be this year, in 2025?
Richard Roberts: I think we're done. I don't see the Fed cutting. Maybe once towards the end of the year, but I don't see it. I see inflationary pressures independent of Trump's tariffs as remaining high. I have the core PCE without consideration of an impact of tariffs at 2.8%, still high.
And I think the Fed needs to continue to focus on inflation and squeeze that out, because otherwise we're going to have long-term problems here.
Southern Finance: In the presser, Powell also highlighted that consumer spending is moderating, while household uncertainty is rising. So how much of a concern is this for economic growth? And will lower consumer spending, which accounts for 70% of the GDP growth in the United States, push the Federal Reserve to cut rates sooner than expected?
Richard Roberts:I think the consumer is slowing down. They had massive savings from the fiscal and monetary policies that were presented to them as a result of COVID. And then after they drew those savings down, and then on the other side ran up credit card balances. And credit card balances are at record highs, although as a percent of income aren't concerning yet. But we're starting to see delinquencies tick up. Auto loan delinquencies are ticking up. So I think the consumer is coming close to being tapped out. That will be a drag on the U.S. economy.
However, the key here at this point is that the Federal Reserve needs to focus on inflation first and foremost. And I think that may come at the expense of a drop in economic growth. I don't see us falling into a recession at this point, but it's not out of the question.
Southern Finance: Why do you think right now inflation is the top priority for the Federal Reserve? Why couldn't it just be a little bit above 2%?
Richard Roberts: I think that the Federal Reserve appears a bit out of touch with the average person in society. True, the rate of price increases matter. But to most folks, it's the cumulative impact of inflation over many years. And Americans are hurting. The fact that inflation is just going up at a lower percent than it formerly was is nice. But that doesn't take away the big increases that occurred over the past several years.
And so I think that we really need to squeeze out inflation and get it back to where we were. That's the rules. We can't change the rules of the game in the middle of the game or the Federal Reserve is going to lose credibility.
Southern Finance: Yeah, that's a very good point. However, some analysts on the Wall Street right now are concerned because they think the Federal Reserve's monetary policy, restrictive monetary policy, may trigger liquidity concerns in the financial markets. Right now, did you observe any red flags in, for example, the banking sector or corporate debt markets that could lead to financial instability?
Richard Roberts: I think it's a fair concern to have on your radar screen. In fact, I believe that one reason the Fed slowed but did not eliminate their QT was just because of that. If they would have eliminated QT, that would be draining liquidity, and possibly that on the edge would turn into a problem, particularly against the backdrop of the congressional spending crisis. Once the debt limit is increased, the Treasury will look to backfill its account at the Fed, known as the TGA account.
And by pulling funds out of the market to fill up their TGA account, that's going to drain some liquidity. So the Federal Reserve slowed its QT, in part, I think, keeping an eye on that concern that you asked about.
Southern Finance: On the other hand, U.S. President Donald Trump has again publicly pressured the Federal Reserve to cut interest rates, even though despite the central bank's historical independence. So how do you assess the potential risks of political influence over monetary policy by central banks?
Richard Roberts: I think history is littered with examples of the downside of politicians getting in the way of central bank activities. In the U.S., we have the 1970s with Richard Nixon and high inflation and so forth. Worldwide, there's many examples, Turkey, South America, and so forth.
So I think, you know, in general, it's accepted and understood that politicians have an inflationary bent to them. They would always prefer lower interest rates for their constituents. They vote for them. And that would not be the proper move in many cases.
I think we want to keep the Congress out of monetary policy decisions of the Fed. Perfect example, as you mentioned, President Trump is jawboning Chair Powell to lower interest rates today. In my judgment, that would be terrible to lower interest rates today because inflation has plateaued, shows some evidence, even independent of the tariffs, of spiking up.
And this is exactly what we don't want to do is to cut interest rates. In fact, maybe part of the inflation problem today is due to the fact that the Federal Reserve cut interest rates, needing not to, in the fourth quarter of last year. Inflation had not tamed and the labor market remained strong and they cut rates, as you recall.
I don't think that was necessary. And I think that has bled somewhat into the stubborn inflation numbers that we're seeing today.
Southern Finance: So given your working experience inside of the Federal Reserve system over 20 years, what economic indicators will you be watching closely to assess if the economy is hiding into maybe stagflation, recession or even a crash?
Richard Roberts: I think most of the data that you and I look at, I mean, the Fed has access to all the data in that. There's a couple risks out there that I think deserve mention. Importantly, banks. There's a lot of exposure to commercial real estate out there. Near $1 trillion of commercial real estate needs to get refinanced this year. And that's going to be tricky with commercial real estate values coming down. The loan-to-value ratios aren't going to work.
If they do work and the loans are refinanced, they're going to be at higher interest rates, and this is going to cause a problem potentially for some banks. We're likely to see the so-called pretend and extend by banks where they just lengthen out the maturity of the loans and so forth, but not all. So we're likely to see some headaches from the commercial real estate sector, in my judgment.
The other issue, let's not forget, about a couple of years ago now, in 2023 in March, we had the old Silicon Valley Bank problem. And you recall very well the problems that at least contributed to those failures. Treasury portfolios held by banks that lost their value.
Normally it's not a problem. If the value of a treasury portfolio goes down, it's an unrealized loss, unless you need to sell that portfolio to raise liquidity. And banks, if they get into a situation where they need to raise liquidity quickly, they're out of reserves, they have to raise liquidity by selling those treasury bills or treasury securities, they will take a loss at that point, and that loss taps into their capital.
So there's potential problems with banks there. Why might they want liquidity? I think because uninsured deposits will flee at the first sign of a problem. So this gets tricky.
If we see a sharp economic downturn, if President Trump continues to be on again, off again with his tariffs, and the markets continue to get concerned about what's this mean for the economy, something like that could cause the flight of uninsured deposits, which in turn could cause some banks to liquidate their portfolios of treasury securities, take a loss, have to dip into their capital, and then we have another SVB type of a situation in the banking industry. So I think the Fed will keep a close eye on that, as well as the general indicators.
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