Trump has called for the Fed to cut rates but the central bank is in a tough spot.
One-year inflation expectations are surging, while data doesn't yet indicate a cut is needed.
President Donald Trump has been making increasingly urgent calls for the Federal Reserve to cut interest rates, but the central bank is in a tough spot.As the Fed kicks off its May policy meeting on Tuesday, there's little expectation of a rate cut, but the chance of rates coming down at later meetings is also low, JPMorgan analysts said.
The bank sees two reasons Fed officials have their hands tied when it comes to monetary policy.
Inflation expectations are rising
Inflation outlooks—coupled with deteriorating soft data—are a good reason to trim rate cut hopes, according to the bank.
The latest consumer inflation reading saw a 2.4% year-over-year rise in March, above the Fed's 2% target. That's still rather low compared to what could come: one-year outlooks compiled by the University of Michigan stand at 6.5%
The steep jump in expectations is likely due to Trump's tariff policy, which is projected to raise costs for consumers. Trade war fears have contributed to rising stagflation risks, ramping up the odds that the US economy finds itself in a position in which growth stalls and prices keep rising. Such a scenario effectively paralyzes the Fed, which can't respond to both problems at once.
Recession not yet priced in
While soft data like future inflation expectations could ultimately be a problem for investors when it weakens, that possibility is being overshadowed by encouraging hard data, at least for now.
The latest macroeconomic figures have continued to hold up, and in some cases, look relatively strong On Friday, a surprisingly positive April nonfarm payroll report boosted investor confidence and pushed stocks higher.The market, in other words, is not expressing a view that a recession is imminent.
After all, SPX is still trading at 21x forward, on 10% EPS growth expectation for this year, and 14% for next. That is far from pricing in any meaningful recession fears," analysts wrote.
This suggests that investors aren't pricing in the first half of stagflation—weak growth—as institutions and households continue loading up on stocks, the bank said.The actual recession could still be avoided, but if one were to come through, the views by many that it is already in the price could prove to be too optimistic," the bank wrote.
Overall, the bank says the Fed is "stuck" dealing with competing macro forces, which will potentially leave it behind the curve when it eventually is forced to act.