A Fractured Fed, Silent Market: Reading the Mixed Signals of the 2025 Financial Landscape

Dot Plot (June 18, 2025)

Crisis Looms, Yet Markets Remain Quiet—Why?

June 2025, Global financial markets remain eerily calm. Despite tariff threats from the Trump administration, escalating tensions in the Middle East, and unprecedented division within the U.S. Federal Reserve (Fed), stock markets continue to trade near all-time highs. But behind this calm, a much greater storm could be brewing.

Deepening Rifts Inside the Fed

Last week, the Fed decided to hold rates steady for a fourth consecutive time. However, internal disagreements within the central bank over rate policy are surfacing like never before. The latest dot plot presents a shocking picture. Out of 19 Fed members, 10 expect more than two rate cuts this year, while 7 see no cuts at all. This marks the largest policy divergence since the 2008 financial crisis.

Particularly striking were comments from Fed Governor Christopher Waller, a leading candidate to succeed Chair Jerome Powell. In a CNBC interview, he said, “We’ve held off on rate changes for six months expecting a significant inflation shock from tariffs, but it hasn’t materialized,” advocating that rate cuts begin next month. This comes amid Trump’s demands for 2.5 percentage points in rate cuts and his attacks on Powell as a “disgrace to America.”

The Shadow of Stagflation

More troubling is the Fed’s latest economic outlook. While the central bank revised down its U.S. growth forecast, it simultaneously raised its inflation projection—a classic signal of stagflation. The World Bank also slashed its global growth forecast to 2.3%, and the U.S. to 1.4%. They warned that if Trump’s 90-day tariff freeze expires on July 31, “global trade could grind to a halt” in the second half of 2025.

The Peterson Institute estimates that Trump’s proposed mass deportation of undocumented immigrants will hit the economy with a time lag. Removing 1.3 million people would cut GDP by just 0.2% this year, but by 2028, that number could grow to 1.2%.

Markets’ Eerie Silence

Despite all these risks, markets remain surprisingly quiet. U.S. equities have risen over 20% since early April and are hovering near record highs. The 10-year Treasury yield stands at 4.4%, nearly a full percentage point higher than last fall, but has recently stabilized. How should we interpret this “market silence”? FT columnist Gillian Tett offers three possible explanations:

1. Delayed Reaction: According to Denmark’s central bank, since 1990, it has taken up to a year for equity markets to fully react to trade shocks. The Bank for International Settlements also forecasts that the biggest hit to investment will occur in 2026, not this year. U.S. and Japanese capital expenditures are expected to fall by 2% next year.

   
   

2. Disaster Fatigue: Investors may be numb to constant shocks—“death by a thousand cuts.” Instead of one-off shocks like the COVID-19 pandemic, we’re now facing a metastasizing “economic cancer” driven by uncertainty.

   
   

3. Confusing Tail Risks: Investors aren’t staring at imminent disaster, but looming tail risks. For example, a full-scale Middle East war that blocks the Strait of Hormuz could push oil above $100 per barrel. But for now, oil remains steady around $75.

   
   

Mixed Signals Across Asset Classes

Cresset’s Chief Investment Officer Jack Ablin put it this way: “U.S. equities are behaving like Trump—chasing short-term wins. Long bonds are acting like Elon Musk—obsessing over long-term, uncomfortable truths.” Indeed, asset classes are sending conflicting signals:

• Equities: Rising, ignoring risk

• Bonds: High yields reflecting long-term concerns

• FX: Dollar weakness signaling doubts about the U.S. economy

• Commodities: Oil steady despite geopolitical risks

  
  

Opportunities Amid Caution

Rick Rieder, BlackRock’s CIO of Global Fixed Income, noted, “The fact that more Fed members now see no rate cuts is telling—there are clearly divisions within the committee.” This uncertainty brings both risks and opportunities. If unpriced risks materialize, a major correction may follow. But for savvy investors, this could be a moment to identify undervalued assets.

Stephen Blitz, Chief U.S. Economist at TS Lombard, stated, “Waller’s comments reflect that the Fed is closer to rate cuts than its public messaging suggests—but we just need clearer signals from the economy.” In short, the second half of 2025 could bring major market swings depending on Fed policy, Trump’s economic agenda, and geopolitical developments. Investors must maintain a defensive posture while staying agile. Often, the quietest markets are those issuing the loudest warnings.