Fed's FOMC Stagflation Expectations Rise

| About: SPDR S&P (SPY)


Fed raised inflation expectations.

Fed lowered growth expectations.

CPI can come in higher tomorrow morning.

We are still SPY bearish.

More than the FOMC statement, the projections showed the more important changes in Fed decisions and what is making them tick.

Our take is that they are very worried about dropping employment, otherwise they would have given hints to higher rates.

GDP expectations down

Fed reported economic projections along with their statement which called for GDP this year of 2% versus the last read in March for 2.2%.

Which aligns with their change in language that economic activity has slowed versus last time saying "picked up."

This is also tough. The definition of this next sentence is summed up by the economic adage "pushing on a string," "Although the unemployment rate has declined, job gains have diminished."

Did that make sense to you? It should NOT. If it does not You are smart! No joke!

How can unemployment go down and jobs diminish, less workers. That's not good for an economy.

The Fed has met their official mandate of full employment but it's not helping the economy because of less workers. That's not good. And they can't loosen any more, they need to tighten because of inflation, which they tiptoed around. They are stuck.

We think this phenomena of tight labor and falling employment is because of a shrinking workforce as the population ages, which is also not good for economic growth drivers. It's showing up now and there is no getting around the baby boom declines (no matter how bullish you are about biotechs).

Inflation expectations up

Core PCE inflation expectations went from 1.2 to 1.4% and core from 1.6 to 1.7%.

As for our "transitory flip" of inflation call and our 16% inflation jump call, that is still in effect. They added the word "past" here:

"but to rise to 2 percent over the medium term as the transitory effects of past [added the word "past"] declines in energy and import prices dissipate and the labor market strengthens further."

We would argue they have not dissipated, they have jumped 16% (see our report to see for yourself).

Be careful of CPI tomorrow.

Fed Funds Expectations Changed...

Next year's Fed Funds expectations went from 1.9 to 1.6.

But this year, despite Fed Funds Futures changes, the Fed DID NOT change their expectations.

Here is the Fed's economic forecasts.

We double checked it, but they give you the new numbers on an upper pair in the rows and the March expectations on the lower pair of the row.

We pointed out what we think is most important from those changes.

Fed focused more on jobs

They lowered their GDP forecasts for next year slightly and lowered their Fed Funds expectations more so for the next two years. They now expect to raise rates less (Next year).

Even though inflation is picking up they think that the jobs number could be a risk that they need to factor into their numbers.

We call that trend stagflation as we said on Sunday (Weekly Catalyst For Down Markets: Stagflation).

Stagflation means inflation with stagnant growth. That is the worst of both worlds. That is bad for markets. And based on the drop in Fed funds expectations for next year, the Fed is ok with letting inflation rise and GDP slow.

GDP has been slowing.

Click to enlarge

As have jobs.

Click to enlarge

But CPI is picking up.

Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May
0.1 0.3 0.2 0.1 0 -0.1 0.2 0.1 -0.1 0 -0.2 0.1 0.4 ?
Click to enlarge
Click to enlarge

This is not a good set up. Tomorrow's CPI number hopefully comes out more benign, but based on their inflation expectations (not comments) you would think CPI could pick up.


We worry about stocks. Stagflation is not a good thing and it's only just begun.

We are bearish on S&P 500 (NYSEARCA:SPY).

Good luck and please be in touch. All of your comments teach US a ton.

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