MacroResearchBoard

Another Dovish Mistake By The Fed? – March 24, 2025

A just-published report updated our view on Fed policy, and concluded that the central bank’s dovish bias will allow inflation to become further entrenched. This, in turn, will eventually force the Fed to pivot yet again, unless protectionist policies cause the economic expansion to derail.

Fed Chair Powell’s view that tariffs will mostly lead to “transitory” increases in inflation were (directionally) reminiscent of its mistake in 2021. Likewise, Powell downplayed the increases in longer-term inflation expectations, which is worrisome.

We disagree with the Fed’s “transitory” inflation view, much like we did in 2021. The Fed’s dismissal of the threat is cementing a higher underlying inflation trend than last decade.

Net: if trade policy calms before doing much economic damage, then the risk for bond investors will be a dovish Fed in an environment of decent economic growth, elevated inflation, and substantial debt issuance. For now, we remain short duration and prefer cash (preferably outside the U.S.).