Table of Contents
The Federal Reserve may be talking tough, but the economic data is about to force a dramatic policy reversal. Here's why an economist just slashed her rate cut forecast and why it still might not be bearish enough.
Key Takeaways
- Economist Dominique cut her Fed expectations from 6 rate cuts to 2-3 cuts for 2025, but still sees July cuts coming
- US-China tariff deal reduced recession risk from 55% to 40% by replacing 145% embargo-level tariffs with 30% rates
- Policy uncertainty remains extremely high despite tariff deal, with Trump still driving decisions personally rather than through process
- Retail sales data shows tariff uncertainty is depressing consumer spending below expectations
- Two consecutive CPI readings below expectations signal demand weakness, not inflationary pressure
- Fed has become artificially hawkish, claiming no hard data weakness when most data predates April 2nd tariff chaos
- Fiscal budget passing could push debt-to-GDP ratio to 125%, raising questions about Treasury safe-haven status
- 17 Fed speakers this week could signal policy pivot as hard data confirms survey weakness
The Rate Cut Revision That Still Expects July Easing
Economic analyst Dominique just made a dramatic revision to her Federal Reserve forecasting, cutting her expected rate cuts from six to just 2-3 for the year. But paradoxically, she still expects the Fed to start cutting by July - earlier than markets anticipate.
The revision reflects two major changes in her economic outlook. First, the recent US-China tariff deal significantly reduced recession risks. "Before, a recession was pegged at 55% chance. Now I'm at 40% each for recession versus self-correcting temporary economic weakness."
The tariff agreement effectively ended what amounted to an economic embargo. "When you have a 145% tariff, it means you basically have an embargo. Now we just have a very high tariff, 30%." This change reduces the risk of manufacturing recession and lessens the hit to real household income.
However, the second major factor - ongoing policy uncertainty - keeps the economic outlook challenging despite the tariff reduction.
Policy Uncertainty: Still Trump-Driven, Not Process-Driven
While markets celebrated the tariff deal, Dominique emphasizes that policy uncertainty remains extremely elevated because decision-making is still entirely personality-driven rather than institutional.
"There is still no process driving policy. It's still driven by President Trump," she explains. Just yesterday, Trump mentioned sending letters to countries about bilateral tariffs "within the next few weeks," showing that major trade policy continues to be announced on his personal timeline and initiative.
"It's clear he's a strong believer in tariffs. That hasn't changed. The pause was more tactical than a change of outlook."
Why Process Matters for Markets:
- Businesses can't plan when policy changes unpredictably
- Investment decisions get delayed indefinitely
- Consumer confidence suffers from persistent uncertainty
- Supply chain planning becomes nearly impossible
This uncertainty is already showing up in hard economic data, with retail sales disappointing and business confidence collapsing.
The Hard Data Catches Up to Survey Weakness
For months, the Fed has dismissed survey data showing business concern while claiming "there is no sign of weakening of the hard data." Dominique argues this position was always misleading due to data timing issues.
"What they forgot to say is that until the retail sales this week, there was no post-tariff hard data. Q1 GDP ended March 31st before April 2nd. And the NFP was collected during April 12 to 16, so employers didn't have time to adjust their hiring plans."
Timeline of Data vs. Policy:
- April 2nd: Major tariff announcements create uncertainty shock
- March 31st: Q1 GDP data cutoff (pre-tariff)
- April 12-16: Jobs data collection period (too early for business reaction)
- This week: First retail sales data reflecting post-tariff consumer behavior
The retail sales data showed exactly what surveys predicted: consumers are pulling back. The control group (which strips out volatile categories) came in below expectations, confirming that uncertainty is depressing spending.
Inflation Expectations: Lower, Not Higher
Contrary to conventional wisdom about tariffs driving inflation, Dominique expects the chaotic implementation to be "much less inflationary than I thought before April 2nd." The reason: uncertainty is crushing demand so severely that it's reducing business pricing power.
Evidence of Demand-Driven Disinflation:
- Two consecutive CPI readings below expectations
- Limited impact on goods prices despite tariffs
- Super core services (excluding housing) declining significantly
- Airlines cutting fares 10% relative to December due to "depressed demand"
"We're starting to see how this depressed demand is forcing businesses to lower prices or keep prices down," Dominique notes. This dynamic contradicts the typical tariff-inflation narrative because the implementation was so disruptive it created economic uncertainty rather than smooth price adjustments.
Fed's Hawkish Positioning Will Reverse
The Federal Reserve has adopted an increasingly hawkish stance, but Dominique believes this positioning is unsustainable as data confirms economic weakness. "The Fed has turned more hawkish. The reaction function has changed, but as we keep getting data showing prices are not rising and demand is weakened, they'll have to turn around."
By July, she expects a Fed rate cut based on current trends, though she acknowledges "uncertainty is super high, so God knows what else will happen."
Why Fed Hawkishness Is Artificial:
- Surveys consistently showed business concern that Fed dismissed
- Hard data is now confirming survey predictions
- Inflation data shows weakness, not strength
- Economic uncertainty typically warrants easier policy, not tighter
The Fed's tough talk may have been politically motivated to demonstrate independence, but data-driven policy should eventually override positioning concerns.
Market Disconnect: S&P Above April 2nd Levels
Dominique expresses puzzlement at market optimism, noting the S&P 500 is trading above April 2nd levels despite a dramatically worse business environment. "I look at the S&P which is above April 2nd and I wonder, because the world is a much more adverse place for businesses than on April 2nd."
She believes markets need to see "more weak hard economic data to come around to the fact that the Fed will eventually have to cut sooner rather than later." This suggests current market positioning doesn't reflect the economic reality of persistent uncertainty and weakening demand.
Fiscal Crisis: 125% Debt-to-GDP Looming
Beyond monetary policy, a fiscal crisis is brewing as Congress considers budget legislation that would dramatically increase government debt. The budget faces a crucial committee vote that could determine whether fiscal conservatives can block passage.
Fiscal Math Getting Worse:
- Federal debt could rise to 125% of GDP from about 100% currently
- Annual deficits would continue at 6-7% of GDP
- No meaningful fiscal consolidation in the proposed budget
- Debt increase of 25 percentage points over the planning period
Dominique warns this fiscal deterioration comes at the worst possible time: "Following this incredibly own-goal tariff implementation and the US disregarding global rules, there is some sign that the Treasury market has lost its safe haven status."
Treasury Safe Haven Status Under Threat
The combination of chaotic trade policy and fiscal irresponsibility may be undermining the dollar's privileged position in global markets. Dominique raises the possibility that "investors start looking at US deficit in the same way as they looked at UK budget deficit."
This would represent a fundamental shift in global finance, where US debt is no longer automatically considered risk-free. "I think we could be in for a bumpy ride in the bond market" if this dynamic takes hold.
The UK budget crisis provides a template: when investors lose confidence in fiscal sustainability, bond markets can force rapid policy reversals regardless of political preferences.
17 Fed Speakers: Policy Pivot Signals Coming
This week features an unusually heavy schedule of Federal Reserve communications, with 17 different Fed officials speaking. Dominique will focus on key figures likely to signal policy shifts:
Key Fed Speakers to Watch:
- Williams (NY Fed President): Permanent FOMC voting member
- Musalem: "Economic-minded speaker" likely to analyze data objectively
- Hammack: "Down to earth markets person and independent thinker"
"I will be looking for any change in their stance following the data releases we had this week," Dominique explains. If Fed officials acknowledge the retail sales weakness and continued disinflation, it could signal the hawkish positioning is ready to reverse.
Housing Market: Stuck in Mortgage Rate Prison
One bright spot for Fed doves is the housing market, which remains completely frozen due to the unique structure of US mortgage markets. "The housing market is stuck largely because of that 30-year fixed rate system we have in the US and the fact that we had been on a 20-year or even more 30-year downtrend in mortgage rates."
With current 30-year mortgages at 7% while many homeowners have rates around 3%, there's massive rate lock-in preventing normal housing market function. This creates a drag on economic activity that monetary policy struggles to address.
Data Calendar: Light Week, Heavy Politics
The economic data calendar is relatively light this week, with home sales (expected to show continued weakness) and PMI surveys (which have "decoupled from GDP" according to Dominique). The real action will be in fiscal policy and Fed communications.
PMI Surveys Less Relevant:
- No longer correlate well with actual GDP growth
- Better for sentiment tracking than economic forecasting
- "More of a trading event" than fundamental data
This makes Fed speaker commentary even more important as markets look for policy guidance in a data-light environment.
Technology Tools: Trump Sentiment Tracking
The analysis team has developed sophisticated tools to track policy uncertainty, including a "Trump sentiment index" based on Truth Social posts and media interviews. When overlaid with market indices, "the correlation with some of those indices is really good."
This represents a new frontier in economic analysis where traditional fundamental metrics must be supplemented with real-time policy sentiment tracking due to the personality-driven nature of current governance.
Investment Implications: Positioning for Policy Reversal
The analysis suggests several key investment themes:
Fixed Income Strategy:
- Long-term Treasuries vulnerable to fiscal concerns
- Short-term rates may fall faster than markets expect if Fed pivots
- Credit spreads could widen as economic uncertainty persists
Equity Market Positioning:
- Current levels may not reflect economic reality of ongoing uncertainty
- Sectors dependent on business investment likely to underperform
- Defensive positioning appropriate until policy clarity emerges
Currency Considerations:
- Dollar strength from higher yields may conflict with safe-haven concerns
- Fiscal sustainability questions could undermine dollar's privileged status
- Policy uncertainty creates volatility in all currency relationships
The July Inflection Point
Dominique's forecast of July rate cuts reflects her expectation that data will force Fed pragmatism over political positioning. The timeline makes sense: by July, enough post-April economic data will exist to confirm or refute current policy assumptions.
If retail sales weakness continues, business investment remains on hold, and inflation stays subdued, the Fed's hawkish stance becomes untenable regardless of political considerations. Markets that price in this reality early could benefit significantly from the eventual policy pivot.
The key insight is that while political noise dominates headlines, economic fundamentals will ultimately drive policy outcomes. The question isn't whether the Fed will cut rates, but whether markets will anticipate the inevitable policy reversal or wait for official confirmation.
Given the lag between economic shocks and policy responses, investors who position for data-driven Fed decisions rather than Fed rhetoric may find themselves ahead of both market consensus and official guidance when the July meeting arrives.
