Markets and Economy Why the Fed may need to stay patient

I’m often asked when I would finally turn negative on financial markets. My answer rarely changes. It’s when the Fed raises interest rates and ends the cycle. Except for the brief and anomalous 2020 COVID-19 recession, monetary policy tightening has often occurred in the later stages of market cycles. That’s why I watch inflation expectations as closely as I do. They tell you how the Fed is performing on its price‑stability mandate, recognizing that it must also pursue maximum employment.

That’s what made last week so puzzling. Reports that the Fed is split on whether to raise rates caught my attention. Not because the debate is inherently surprising, but because it feels disconnected from the world we’re living in today. It made me wonder whether policymakers still believe it’s March 2026, or whether they’ve noticed that three months have passed.

Changes since March

Back in March, following the outbreak of the war with Iran, the inflation story was obvious. Oil prices surged.¹ The 3‑year Treasury inflation breakeven pushed toward a 3% peak on March 18.² The 5‑year breakeven climbed to 2.74% on the same date.³ I took some comfort in the fact that the 5‑year never breached 3.0% the way it did in 2022 during the supply‑chain crunch and Russia’s invasion of Ukraine. But still, the direction was clear. Inflation expectations were rising, and the Fed had reason to sound vigilant.

But that was March. Today’s environment is fundamentally different. Oil prices have dropped dramatically.⁴ Inflation breakevens have followed.⁵ The 1‑year breakeven is now below 2%, a level that hardly suggests “overheating.”⁶ If anything, it may be the opposite. Inflation pressures have been fading, not accelerating.

So why exactly would the Fed be raising rates? It’s not as if the economy is running hot. Job growth has been relatively soft, despite the recent three‑month stretch of better‑than‑expected gains.⁷ Wage growth has been moderating.⁸ That’s why last Thursday’s Fed‑induced market selloff and the flattening of the yield curve left me scratching my head. The market seemed to react to a Fed that’s still fighting the war‑driven inflation scare of early spring rather than the reality of mid‑June. The stance feels backward‑looking, as if policymakers were anchored to the moment oil spiked rather than when it dropped dramatically.

Fed on hold

In my view, the Fed remains on hold, and the next move (whenever it comes) may more likely be an easing than a hike. The current shape of the yield curve suggests policy may be restrictive. If the Fed were to tighten into this backdrop, it could risk contributing to a downturn it’s trying to avoid.

The upshot is that the cycle has continued. Peaks in oil, interest rates, and inflation expectations⁹ have often coincided with turning points that can support broader markets, not undermine them. Unless the data shifts meaningfully — and right now it has still shifted in the opposite direction of what a rate hike would require — the Fed’s most prudent course to me is patience.