Global markets have benefitted from the lack of trade-related noise over the past few weeks, with markets outside of the U.S. continuing to outperform year-to-date. Despite the relative calm on the tariff front, there were important developments elsewhere. Notably, another interest rate cut by the Bank of Canada, the appointment of Mark Carney as Canada’s Prime Minister, and reports that a federal election will take place next month. Overseas, a partial ceasefire was negotiated between Ukraine and Russia. Meanwhile, some budget changes were approved in Germany that set the stage for a significant increase in military spending and infrastructure investment. We plan to discuss these over the weeks to come. Today, we address the U.S. Federal Reserve’s latest update, which pointed to some stagflationary effects – where growth slows, and inflation rises.

The U.S. Federal Reserve kept interest rates unchanged at its recent meeting and revised a few of its economic projections. Its forecasts for economic growth were revised lower to 1.7% for 2025, and to 1.8% for both 2026 and 2027. Meanwhile, its inflation projection for this year was revised higher, to 2.7% from 2.5%, but its estimates for 2026 and 2027 were left unchanged. In summary, it expects lower growth through the next few years, and a temporary bump in inflation this year before it reverts to lower levels. The Fed also revealed that, on average, its policy makers expect two interest rate cuts this year, followed by two more in 2026, and one in 2027, which was unchanged from its prior assessment late last year.

The Federal Reserve’s official statement suggested it felt that U.S. economic activity was “solid”, with a healthy labour market, and inflation that remained “somewhat elevated”. It acknowledged that uncertainty had risen, and it was paying close attention to the risks of both sides of its dual mandate: unemployment and inflation.

Our simple takeaway is that the Fed is nearly as uncertain over the trajectory of the U.S. economy as everybody else. It is hard to fault them as government policy has been erratic through the first few months of the year. As a result, the Fed now finds itself in a more difficult position where growth is slowing, and inflation is rising.

We are not necessarily standing still. Given a more cautious mindset, we continue to review portfolios, ensuring that asset allocations are in-line with the targets set in our investment policies and financial plans. As a general rule, we tend to get more enthusiastic about investing opportunities when negative sentiment is at an extreme and valuations are cheap. The sentiment side, while not yet at an extreme, has turned more negative this year, but valuations still have a way to go in our view.

Thanks for tuning in and see you in two weeks.