The Federal Reserve left interest rates unchanged at 4.25%-4.50% on Wednesday, with Chairman Jerome Powell reviving the term “transitory” to describe the potential inflationary effects of new tariffs.

While the Fed still projects two rate cuts in 2025 in its latest dot plot, projections now reflect lower growth and higher inflation, fueling renewed concerns about stagflation.

Economists are increasingly skeptical of the Fed's confidence in inflation easing, with some warning of policy missteps and rising recession risks.

Here's a summary of key reactions from leading economists.

';Transitory' Is Back: A Risky Assumption

Allianz chief economic adviser Mohamed El-Erian criticized Powell's use of “transitory” to describe tariff-driven inflation, recalling the Fed's 2022 mistake when it downplayed persistent price pressures.

“It's simply too early to say with any degree of confidence that the inflationary effects will be transitory,” El-Erian said, adding that businesses and households “still have fresh in their minds the recent history of high unanticipated inflation.”

Given the uncertainties, he expected Fed officials to show “greater humility.”

The Kobeissi Letter ridiculed Powell's response to stagflation concerns, recalling a past press conference where he dismissed the risk, saying he wasn't seeing the “stag” or the “flation.” Yet, that stance now appears contradictory, as the Fed's latest projections show slower GDP growth alongside rising inflation and unemployment.

“We are now seeing the ‘stag’ and the ‘flation’.”

Mixed Signals On Inflation And Growth

Jeffrey Roach, chief economist at LPL Financial, said the Fed’s decision was unsurprising, as policymakers are “in the midst of policy fog” while awaiting the impact of upcoming tariffs.

He highlighted that despite upside risks in recent inflation data, core inflation should decelerate by summer, allowing the Fed to begin cutting rates in June.

Steve Wyett, chief investment strategist at BOK Financial, stressed the uncertainty arising from the Fed’s forecasts.

“The Fed remains as confused as the rest of us as to what the impact of policy changes will be,” he said.

Charlie Ripley, senior investment strategist at Allianz Investment Management, highlighted the Fed's struggle to balance growth and inflation expectations.

“Growth appeared to be downgraded more than the uptick of inflation expectations, yet the pace of expected rate cuts remained the same,” he said, pointing to continued uncertainty around inflation. Yet, the Fed's decision to slow the run-off of its balance sheet in April provided “some consolation” for investors.

Recession Warnings Grow Louder

David Rosenberg, president of Rosenberg Research & Associates Inc., indicates the Fed's updated unemployment forecast is a strong recession indicator. He noted that the Fed now sees unemployment rising to 4.4% by year-end, which historically signals an economic downturn.

“Back to 1948, that has never happened without an NBER-defined recession,” Rosenberg said, referring to the National Bureau of Economic Research, which officially declares U.S. recessions.

He warned that if past trends hold, a recession could materialize as early as July, well before the Fed takes any significant action.

Is Powell Too Dovish?

Spencer Hakimian, founder of Tolou Capital Management, described Powell as “very dovish,” suggesting the Fed is either underestimating inflation risks or “hoping for a miracle.”

“They see higher inflation. But they’re projecting two more rate cuts,” he said, calling the approach a “heads I win, tails you lose” scenario. Despite his concerns, Hakimian remains bullish on risk assets, advising investors to stay “long a good amount of risk,” with 40-50% exposure.

Market Reaction

Despite concerns from economists, Powell's remarks fueled a risk-on rally.

The S&P 500 index – as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY) – closed 1.1% higher on Wednesday, while the tech-heavy Nasdaq 100 jumped 1.4%. Bitcoin (CRYPTO: BTC) surged past $85,000, and gold extended record highs, rising 0.5% to $3,050 per ounce.

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Image created using artificial intelligence via Midjourney.