The Federal Reserve and Its Wet Blanket

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John Norris (00:30):
Well, hello again, everybody. This is John Norris with Trading Perspectives. As always, we have our good friend Sam Clement. Sam, say hello.

Sam Clement (00:36):
John, how are you doing?

John Norris (00:36):
Sam, I’m doing fantastically—thank you for asking. I’ve got to tell you, though, here we are on Wednesday, June 18th, 2025, in the afternoon. And with everything going on in the world—obviously, the situation with Israel and Iran is dominating global headlines—a lot of people in our industry, particularly on the investment side, have really been waiting for this day.

Not because of anything Israel is doing with Iran. Not because of a G7 meeting or anything like that. They’ve been waiting because today marks the conclusion of the most recent Federal Open Market Committee meeting. That means we find out what direction U.S. monetary policy is heading.

So Sam, the question is: Did the Fed cut rates today?

Sam Clement (01:23):
Well, they didn’t cut rates—and they weren’t expected to. The Fed doesn’t like surprises, so that in itself wasn’t a surprise. But Fed meetings are starting to feel like the way inflation prints used to feel. Each time, people say, “This is the biggest one yet.”

It seems like at every Fed meeting, we’re saying, “Okay, this is the big one.”

John Norris (01:44):
This is the big one. Everyone’s watching with bated breath.

Sam Clement (01:47):
Exactly. Hoping to get some clarity on what the next six to twelve months will look like. And every time, we get pretty much what we expected—and not much more.

That seems to be where we’re at again. Not that people said this was the most important meeting in years, but they thought it would finally bring clarity about what’s coming next.

It really didn’t. You look at the dot plot—there’s not a lot of confidence there. And while some people like to dismiss it due to its past inaccuracy, even the Fed itself acknowledged that tariffs are probably going to have an impact.

They just don’t know how much, and they’re leaning toward the upside. But really, not much has changed.

John Norris (02:30):
Not much at all. And if you look at the projections from FOMC members—the median forecasts for GDP, inflation, and other indicators—they’re making predictions through the end of 2025, 2026, 2027, and even further out.

Now, listen: these are bright people with all the credentials you can imagine, but no one can see the future that clearly. Once you get past 2025, I take most of those estimates with a grain of salt.

What struck me the most, though—what I really didn’t like—was that all the median forecasts for gross domestic product are around 1.8%.

You get a steady diet of 1.8. That’s the median estimate for 2025, for 2026, for 2027—even the long-term projection. From what they showed in the dot plot summary of economic projections—or whatever they’re calling it now—it’s 1.8%. If I’m not mistaken.

I—

John Norris (03:48):
I’m reading their report, and Sam, I’ve got to say—without mincing words—that’s not good enough.

Sam Clement (03:55):
And that’s what we’ve been talking about for weeks, whether it’s budget deficits, rate cuts, tariffs—whatever it is.

We’ve been saying we need to push for more growth. We need something closer to 3% than something with a one-handle.

John Norris (04:12):
Exactly. A one-handle doesn’t cut it. We’re forecasting an aggregate deficit of about $20 trillion over the next decade.

If we’re only growing at 1.8%, we’re going to wish it was only $20 trillion. Did I say billion earlier? I meant trillion—you know what I mean.

At 1.8%, and without a significant number of rate cuts forecasted for 2025, it suggests they’re really uncertain about inflation data.

Sam Clement (04:50):
Yeah, and to me, the takeaway from the dot plots isn’t so much about predicting where rates will land—it’s more about the insight into the Fed’s thinking. It shows where the pain points are that might lead them to cut.

If they’re saying unemployment might be higher than they expected, but they’re still projecting fewer cuts, that tells me something. To me, that says they’re willing to tolerate a little more pain on the jobs front in order to control inflation.

That’s the kind of signal I take away from the dot plot—not necessarily a precise rate path, but more about how they’re prioritizing their goals. And frankly, even the next few meetings feel like they’re up in the air.

John Norris (05:31):
I think you’re right. My forecast for 2025 hasn’t changed. I started the year saying the Fed would have enough data by midyear to justify cutting the overnight rate three or four times before year-end.

And that still stands. In fact, the data keeps coming in a little bit softer—softer on the economic side and softer on the inflation side.

Sam Clement (05:58):
Honestly, I think we’re already at a point where we have enough ammunition to cut rates.

That’s not necessarily saying we should, or that we will—but from a purely data-driven standpoint, we could. And the Trump administration is already saying we should cut by 100 basis points—maybe even 200, depending on which day you ask him.

I think he’s right in the sense that there’s a case to be made for rate cuts right now.

If you take away two big factors—tariffs, and the political pressure from the administration—maybe we’d have already seen a cut.

It’s hard to know for sure, but if there weren’t tariffs on the table, and if the president weren’t publicly pushing Powell to cut, I think there’s a real chance we would’ve gotten one today.

John Norris (06:56):
I think you’re really onto something. If you look at the PCE—the Personal Consumption Expenditures Price Index—the trailing 12-month rate is something like 2.1%.

Sam Clement (07:08):
Yeah, low twos.

John Norris (07:09):
Exactly. But today’s dot plot shows a forecast of 3% inflation for the rest of the year. That’s the median estimate—3%.

So it’s currently around 2.1%, maybe 2.2%, and yet they’re projecting a significant jump. That suggests something’s out there spooking them.

Interestingly, the word “tariff” doesn’t appear anywhere in the report. Not once. But that kind of upward revision from current data to projected data implies that something is looming, and the only thing that really makes sense is tariffs.

Sam Clement (08:06):
Yeah.

John Norris (08:06):
So without that tariff risk, I think the median inflation forecast would be closer to where we actually are. And that would be low enough, in my opinion, to justify a cut—especially when you’re staring at a long-term GDP forecast of 1.8%.

If inflation’s at 2.1%, maybe not exactly where you want it—but close enough that I’d say, yeah, let’s start easing a little.

But because the president has kicked off a trade war, which could be inflationary—even though the data doesn’t show it yet—and because he’s tried to publicly pressure Powell into cutting, we didn’t see a cut today.

If those two things hadn’t happened, I don’t think we’d still be sitting at the current upper band of 4.5% for Fed funds. I think we’d already be closer to 4%.

Sam Clement (08:46):
And Powell even mentioned in his remarks today that the upward shift in inflation expectations was due, in part, to the anticipated effects of tariffs—at least in the short term.

So yeah, that’s already factoring into their thinking, and it’s going to continue influencing their decisions.

You also mentioned the Fed’s independence—and that’s a big deal. That’s a major theme.

John Norris (09:08):
Absolutely.

Sam Clement (09:08):
And we’ve talked about this before: just because the Fed starts cutting rates doesn’t mean they’re suddenly slamming on the brakes.

It’s not going from gas pedal to full stop. It’s more like easing off the accelerator. You might get a few small cuts, and that’s just the beginning of loosening policy.

If GDP growth is in the 2% range, then yeah, a couple of cuts is just softening the stance—not going full dovish. There’s definitely enough justification for that.

John Norris (09:51):
I hope we never go back to a time when the Fed thinks it’s desirable—or even acceptable—to take the overnight lending rate down to 25 basis points.

That was foolishness, in my opinion.

John Norris (09:51):
I hope we never get back to a period when the Federal Reserve thinks it’s desirable—or expedient, or whatever word you want to use—to take the overnight lending target back down to 25 basis points.

That was foolishness, in my estimation.

Now, we didn’t get the recession we probably could have, would have, or should have. And yes, we were able to grow paper assets significantly. But we also borrowed an enormous amount of money at the federal level—which has led to the debt problem we have today.

Dropping rates to that level again would just encourage the knuckleheads on Capitol Hill to borrow even more money, which we’ll all have to deal with eventually.

Sam Clement (10:31):
And the CBO even said that in their latest estimates. They looked at that “one big beautiful bill,” and when they factored in higher interest rates—what it would cost us to borrow—the projected deficit rose even more. That $20 trillion figure? It’s going even higher.

John Norris (10:49):
Right. Everyone’s expecting the $20 trillion to go even higher.

And shifting gears just a little bit: we were planning to talk about the FOMC today, but since we’re on the subject of the deficit—

I had a conversation last night with my daughter, Annie, and my wife, Beth. We were talking about how federal budget cuts are disrupting things like scientific research.

And I made what I thought was a benign statement, but they didn’t take too kindly to it.

Shows you how much political pull I’ve got in my house. I said, “Everyone’s all for balancing the budget… until it’s your budget that gets cut.”

You know what I mean?

It’s like, “Yeah, I’m all for cutting spending—until it’s my program.”

Imagine if I said to you, “Hey Sam, guess what? That funding you’ve been getting from Washington? Yeah, that’s gone.”

Suddenly everyone says, “Whoa, whoa, whoa, hold on—let’s not get crazy.”

Sam Clement (11:48):
Exactly.

John Norris (11:49):
That’s what I think we’ll see again and again over the next decade. Unfortunately, we’re going to have to come to grips with this.

And some programs are simply going to have to be trimmed—one way or another.

Sam Clement (12:10):
If you can’t grow your way out of it…

John Norris (12:12):
And at 1.8%, we’re not growing our way out of anything.

If that’s the long-term forecast—if 1.8% is what our best economists are projecting—then no, we’re not growing out of it.

Sam Clement (12:31):
To me, that’s the bigger concern.

The deficit’s always going to be there. We’re the United States—we’re always going to run a deficit.

John Norris (12:39):
Yeah, we’re not paying that off.

Sam Clement (12:41):
It’s the capital account versus current account. As a country that consumes so heavily, we’re always going to run budget deficits. That’s not going away.

John Norris (12:51):
Right—until we start producing more than we consume, we’re going to keep running up debt.

Sam Clement (12:57):
Exactly. So to me, the bigger issue isn’t the debt itself—it’s the sluggish growth.

That’s a much more serious long-term threat.

People have been warning about the deficit for decades. If you had positioned your portfolio in 2010 based solely on deficit fears, you would’ve missed a lot of growth.

Our economy is more dynamic now than it was back then—and the deficit still isn’t a critical issue.

I’m sure it will become a crisis one day, but even countries like Japan are in far worse shape than we are.

So yeah, it’s a problem—but not the biggest one. Growth is the real concern.

John Norris (13:59):
Yes.

Sam Clement (14:00):
We have to grow. If we don’t, then that’s when the collapse starts.

Not when the bill comes due—but when the growth stops. That’s the tipping point.

We’ll survive the debt as long as we’re growing. But once we stop…

John Norris (14:30):
Totally agree.

Sam Clement (14:31):
We’re the global reserve currency. There’s almost endless demand for U.S. Treasury debt.

John Norris (14:07):
Almost.

Sam Clement (14:08):
I’d argue there will always be demand.

John Norris (14:10):
There will—but maybe not at today’s interest rates.

The Fed has been a major buyer, but yes, as long as the U.S. is viewed as a good bet, there will be demand.

That’s because historically, we’ve upheld the rule of law. We’ve had strong protections for private property, and we’ve grown at a decent pace.

But if we’re only growing at 1.8%… that might still attract capital—just on a relative basis, because the rest of the world might be even worse off.

Sam Clement (14:52):
Yeah, you’re playing the relative game. And at the end of the day, U.S. Treasuries are still the benchmark asset—pretty much for every other asset on earth.

John Norris (15:01):
Okay, let’s play that out a little more—veering even further away from the FOMC meeting itself. But this all ties into the broader conversation around monetary policy and where the Fed might be headed in the next decade.

If the Fed thinks we’re going to grow at 1.8%, let me ask:
Is the UK going to grow faster?

Sam Clement (15:19):
Probably not.

John Norris (15:20):
France?

Sam Clement (15:21):
Probably not.

John Norris (15:22):
Germany?

Sam Clement (15:24):
Maybe, but probably not.

John Norris (15:26):
Italy?

Sam Clement (15:27):
I don’t think so.

John Norris (15:29):
Japan?

Sam Clement (15:30):
Look, all these countries—

John Norris (15:32):
You know what my point is.

Sam Clement (15:33):
Exactly. All of these countries still rely on U.S. growth to some degree.

Maybe we’ve seen a bit of a shift recently in Germany. They’ve signaled plans to spend significantly more, and that’s helped drive some of their market rebound.

John Norris (15:54):
I’ll believe it when I see it.

Sam Clement (15:56):
Fair enough.

John Norris (15:58):
When Panther tanks start rolling off the assembly line and heading to the eastern front, then I’ll believe Germany’s really making a shift.

Sam Clement (16:02):
That’s fair. But do we start to see some of these countries shift toward those max-deficit-spending years that analysts are predicting?

That’s been part of the rationale behind recent stock market gains in Germany and other developed countries.

John Norris (16:19):
The painful thing is that many of these European countries are already in roughly the same fiscal shape we are—but they spend nothing on defense.

To even get to 2% of GDP on defense spending—which is what they’ve committed to—they’d have to make significant increases.

And getting to 3%, or the 5% our president has demanded? Forget it. We’re not even at 5% ourselves.

But to get from where they are now to 2% or 3%? That money has to come from somewhere. And the money isn’t just sitting around waiting to be spent.

So their budgets are going to get even more upside down.

Sam Clement (16:52):
Oh, absolutely. And I think Germany’s plan—or at least the expectation—is that they’ll follow through on those spending increases.

John Norris (16:58):
At the same time, the Green Party is making sure the German industrial machine doesn’t have access to competitively priced energy.

So how’s that going to work?

John Norris (17:09):
I don’t know, man.

1.8% might be disappointing here in the U.S., but it could still look pretty good on a relative basis.

Even so, circling back to the FOMC meeting—because we’ve talked a lot about international stuff lately—I was kind of surprised by how little the Fed’s official statement changed today.

People really overanalyze those things—doing mental gymnastics to parse every single word.

But when I saw the dot plots and listened to the beginning of Powell’s comments, it all felt like déjà vu.

Sam Clement (17:57):
Like we said earlier—every meeting feels like the big one. Then afterward, we all say, “Well, that wasn’t much.”

It’s Yogi Berra: it’s déjà vu all over again.

John Norris (18:08):
Exactly. The Fed didn’t cut rates. The dot plots basically repeated what they’ve said before. Powell’s comments didn’t reveal anything new.

And the Fed Funds futures market didn’t move much before we started this conversation.

So why do we get ourselves so worked up about these meetings? They happen every six weeks. We obsess over them, then nothing changes, and then we start building up the anxiety again.

Sam Clement (18:27):
Rinse and repeat. It’ll happen again in six weeks.

And next week it’ll be PCE. That’ll be the big thing.

GDP doesn’t even seem that important anymore.

John Norris (18:38):
Yeah, GDP just isn’t getting much attention.

Sam Clement (18:42):
It’s all about inflation now.

John Norris (18:43):
Exactly. If you look at the headlines—and while we do all our own research here at Oakworth, we also pay attention to the broader conversation—if you read The Wall Street Journal, Bloomberg, any major outlet, no one’s talking about the weak GDP report from Q1.

No one’s talking about the upcoming Q2 GDP report, either.

Sam Clement (18:58):
Which could end up being the reverse of Q1.

John Norris (19:00):
Exactly. It might come in at 3.5%, maybe even 4% GDP growth.

Sam Clement (19:07):
But if that happens, it’ll likely reflect slightly slower consumer spending and slightly slower private fixed investment—offset by a major improvement in our trade deficit. That’s where the lift will come from.

John Norris (19:15):
Right. But nobody’s talking about that.

All the focus is on two things: inflation and the labor market.

Because those are the two things that help everyone try to forecast what the Fed is going to do.

So every six weeks, we go through this routine—listening to the Fed, dissecting every sentence, and having conversations like this.

Sam Clement (19:31):
Yeah, it’s trade war and the Fed. Those are the big ones.

And like we’ve said before, those two are closely tied together.

It seems like the market is really focused on one issue—but in reality, it’s multiple things tangled together: labor market conditions, Fed policy, and the looming threat of a serious trade war.

The question is: what path do we end up taking?

John Norris (20:00):
Right.

Sam Clement (20:01):
Do we get a soft landing and avoid an actual trade war? Then the market probably keeps going up.

But if we get the opposite—if the economy slows down, the Fed is behind the curve, and we enter a full-blown trade war—that’s a much worse outcome.

That’s what the market’s trying to figure out.

John Norris (20:19):
Let me ask you this, Sam—just in terms of prioritizing the risks:

Which is more important to the U.S. stock market right now—a global trade war, or a military conflict between Israel and Iran?

Sam Clement (20:42):
Honestly, I think it’s the trade war.

If we get a real, sustained trade war—and I don’t know if what we have now qualifies—but if tariffs escalate on both sides, that’s what triggers everything.

That’s what slows the labor market. That’s what pushes us into a recession. That’s what brings all the negative economic outcomes the market is worried about.

War, on the other hand—at least historically—hasn’t necessarily been terrible for markets.

It’s incredibly hard to trade, and highly unpredictable. But it’s not automatically bad.

Kuwait in 1990–1991 is a great example—it was extremely hard to trade around, but not necessarily devastating to the market.

And just look at Israel: their stock market has been hitting all-time highs over the past year or two—even with everything going on.

John Norris (21:30):
Yeah, I agree.

I mean, take last Friday, for example—when Israel started bombing Tehran.

Sam Clement (21:40):
Yeah, Thursday night into Friday morning.

John Norris (21:41):
Right. And here we are, five days later—has the stock market really changed all that much? Have interest rates?

Maybe a little. But over the weekend, there was a lot of fear—people were talking about World War III. It felt like it could escalate dramatically.

And maybe it has escalated some—but it hasn’t spread.

And as a result, that conversation has already faded, even around here in the office.

And when something falls out of conversation around here, that tells you something.

John Norris (22:22):
At this point, the only real concern anyone around here seems to have about that conflict is whether the Iranians eventually shut down the Strait of Hormuz.

And that’s it. That’s the one wildcard—what would happen to oil prices if that strait gets blocked?

Sam Clement (22:36):
Even oil prices haven’t spiked that much. They’re up, sure—but they’re not at $90 or $100 a barrel like some people feared.

John Norris (22:45):
Right. Not even close.

So you look at all this and think, “Huh… we kind of forgot about it pretty quickly.”

Come Monday afternoon, after the close of trading, everyone had already shifted their focus back to the FOMC meeting.

And as we’ve established here—today’s meeting was just another snoozefest.

Sam Clement (23:03):
Yep.

John Norris (23:04):
So going back to what’s actually important: resolving this trade war and the tariff mess. That’s the biggest issue.

Let’s get that behind us. Let’s get the bill out of the Senate and passed. Let’s get those 2017 tax cuts extended.

Then, let’s tackle the regulatory environment.

And let’s grow this economy—far beyond 1.8%.

John Norris (23:26):
I know I’ve said that over and over again, and people listening are probably going to fall asleep tonight with the phrase “1.8%, 1.8%” echoing in their heads.

But seriously—of everything in the dot plots, that’s the one thing that bothered me the most.

Alright guys, thank you so much for listening. We always love to hear from you.

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Alright, Sam—anything else you want to add on this very important topic?

Sam Clement 
That’s all I’ve got.

John Norris 
That’s all I’ve got today too. Y’all take care.