Here's how Wall Street is reacting to the Fed's updated rate cut outlook

CNBC

4 hours ago

Wednesday's Federal Reserve update kept intact a key interest rate projection that Wall Street was looking for, but it also raised concern about deeper structural problems for the U.S. economy. The official forecast from Fed officials still pointed to two interest rate cuts in 2025. But Fed officials also lowered the outlook for economic growth and raised the inflation forecast — sparking concern from some experts about potential stagflation in the U.S. economy, when sluggish growth is accompanied by stubborn price increases. Fed Chair Jerome Powell also cautioned against reading too much into the so-called "dot plot" of interest rate cuts in his press conference. A key worry would be that inflation stays above the Fed's 2% target, possibly because of tariffs, and makes it difficult for the central bank to cut rates even if unemployment starts to rise. "We expect the Fed to cut later this year, but look at the balance of shifts in these forecasts: we're going from stagflation-light to maybe stagflation-moderate," Frances Donald, RBC Capital Markets Chief economist, said on CNBC's " Power Lunch ." However, others seemed encouraged by the fact that there was still support for two rate cuts this year. "This is a dovish hold that keeps the door open to rate cuts in the second half of 2025. The Fed is clearly signaling that it is not in a rush, but is prepared to act if inflation continues to ease and labor market softness deepens," said Dan Siluk, head of global short duration & liquidity and portfolio manager at Janus Henderson Investors. "The upward revision to inflation forecasts may temper expectations for aggressive easing, but the unchanged 2025 rate path reassures markets that the Fed remains flexible." Here are other reactions from investors and Wall Street experts: David Kelly, chief global strategist at JPMorgan Asset Management, on "Power Lunch:" "I think they could hold rates all the way until the end of the year. ... Right now, do not hold your breath waiting for low rates from the Federal Reserve, because they don't seem to have any intention of delivering them." Jim Caron, chief investment officer of Morgan Stanley Investment Management's portfolio solutions group, on "Power Lunch:" "What the Fed is basically saying is that the risks to inflation are skewed to the upside. The risk to unemployment is also skewed to the upside. This is what I think is somewhat being confused as a stagflationary event for markets. This is really about a risk distribution. ... We're moving towards a no-rate cut environment going forward" Bill Adams, chief economist for Comerica Bank: "The Fed doesn't have great tools to combat stagflationary shocks like tariff hikes or Mideast oil supply disruptions." Richard Flynn, managing director at Charles Schwab UK: "The larger story here is that there is a clear misalignment between political expectations and monetary policy objectives, as the Fed continues to maintain a wait-and-see approach to gauge the downstream impact of tariffs on the broader economy before taking action." Jamie Cox, managing partner for Harris Financial Group: "The Fed continues to overplay the inflation story and isn't paying attention to burgeoning demand weakness. While the dot plot forecasts 3 rate cuts through 2026, the more likely scenario is 3 rate cuts by the end of 2025." Loretta Mester, former Cleveland Fed president and adjunct professor at the Wharton School, on "Power Lunch:" "Even though they may look through the price increases that come from tariffs, there's no compelling reason for them to make a change now in the policy rate, with the economy performing pretty well, and they're still uncertain about the second half. So I think they made the right move today by doing nothing with the funds rate." Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management: "Today's FOMC meeting had a dovish tone with the dot plot continuing to signal two cuts this year despite upward revisions to members' near-term inflation forecasts. Implicitly FOMC members continue to expect stronger near-term inflation to prove largely transitory and their tolerance to upward moves in unemployment remains low. We expect the Fed to remain on hold at next month's meeting but think a path could open up to a resumption of its easing cycle later this year should the labor market weaken." Jerry Tempelman, VP of fixed income research at Mutual of America Capital Management: "Even though the Fed's median projection is still for short-term interest rates to be lower by half a percentage point by year-end, the skew of the 19 FOMC participants around that median projection is more hawkish than it was in March. As many as seven participants now project no change in short-term rates by year-end; in March only four participants were projecting no change." Scott Welch, CIO at Certuity: "The Fed is supposed to be independent, it's supposed to be data-dependent, and if you look at things that they're supposed to focus on — which is the labor market and inflation — there's just no reason for them to have cut today. The employment situation is cooling, for sure ... but nothing problematic just yet." Jason Pride, chief of investment strategy and research at Glenmede: "While the public line from Fed officials has so far stressed a patient approach, investors might soon expect to hear more diversity of opinion regarding the path for rates, especially as incoming data allow for more informed theses for the economic outlook." — CNBC's Sarah Min contributed reporting.