- The Fed is walking a tightrope between rising inflation and weakening employment data.
- Tariffs and shifting policy uncertainty are clouding the economic outlook and investor confidence.
If you grew up in the era of traveling circuses, you’ve likely heard the phrase that inspired this title. For those who didn’t experience that spectacle, picture someone walking across a tightrope suspended fifty feet in the air. The Wallenda family famously performed such stunts over Niagara Falls and other dramatic locations.
This image captures the dilemma currently facing both the Federal Reserve and the broader markets. In the case of the Fed, they are balancing two competing forces:
- Inflation
- Employment
Inflation
While inflation has come down from its peak, it has proven stubborn to get below the 3 percent mark.
The impact of recently enacted tariffs could complicate this further. My guess is that tariffs will hit growth first, and then spark price increases as companies raise prices to protect margins.
Employment
Employment data is just beginning to show signs of stress – more layoffs, slower hiring. Since jobs data typically lags, it’s likely the Fed will need to cut short-term interest rates in an effort to stabilize the economy (before a recession occurs). However, it will also need to hope the bond market doesn’t push long-term rates higher in response.
Tariffs
Hanging over all financial markets and the Federal Reserve is the specter of daily whiplashes in tariff policies. This high level of uncertainty makes everyone “pull in their horns”. By that I mean that businesses don’t have the confidence to invest in long term projects and individuals defer all significant purchases that can be deferred for as long as possible. Everyone is cautious.
For investors, the central question is whether the technology sector can continue carrying the market, or whether it too will eventually bend under the weight of these macroeconomic pressures.
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