Thus Saith The Fed...?
Three Paths, One Hike Left? Navigating the Fed’s Forecast
The Federal Open Market Committee met last Wednesday (May 7th, 2025) and we have rumors of a China trade deal that is coming, or so we hope. The S&P 500 opened up higher today as a result of the China trade deal, however, this could be a sugar high. As we stated in our May newsletter that economic data is beginning to deteriorate and we gave three possible scenarios:
What Happens Next? Three Scenarios to Watch
1. The Goldilocks Scenario (a “soft landing”)
Probability we think this happens: 40%
If inflation cools, earnings stay strong, and unemployment remains low—the Fed can start cutting rates. This creates the ideal setup: stronger market returns, lower volatility.
2. Recession Warning
Probability we think this happens: 60%
If the Fed cuts rates because unemployment rises, it’s a bad sign. The market likely sells off again.
3. Stagflation Risk
Probability we think this happens: 20%
If the Fed holds rates steady while unemployment rises and inflation stays high?
That’s stagflation—a worst-case combo for markets.
The Fed kept rates the same for the May 7th meeting but what about going forward?
Check these statistics from the CME Group Fed Watch:
JUNE: 91.9% probability they keep rates the same targeting 4.25-4.50%
JULY: 59.6% probability they keep rates the same targeting 4.45-4.5%
AUGUST: 52.5% probability they drop rates 0.25% and target 4.00-4.25%
OCTOBER: Mixed bag of keeping rates at the September target 4.00-4.25% and dropping another 0.25% to target 3.75-4.00%
DECEMBER: same expectations as October meeting.
In other words…
The market is only expecting one rate cut this year, thus playing into our third scenario above of stagflation risk. Other areas of the market are confirming this with Crude Oil moving higher post Fed meeting and a lot depends on price of Crude as it increases cost of production and distribution. Couple that with tariffs, albeit lower tariffs than before, you get stagflation risk where interest rates remain elevated and inflation stagnant.
We are keeping a close eye on jobless claims to be the trifecta of the stagflation environment the market fears.
As always, thanks for reading!