Macro Analysis: The Fed's Quiet Pivot: Contradictions, Valuations, and the Anatomy of a Fragile Rally

Thoughts on the Market by Andy Krieger

May 11, 2025

The Federal Reserve has ended quantitative tightening, resumed balance sheet expansion, and held rates steady, all while inflation remains above target for the sixth consecutive year. Equity valuations sit at levels exceeded only once in modern history. Inflation expectations are deteriorating on every time horizon: University of Michigan 1-year expectations reached 4.7–4.8% in April before easing slightly to 4.5% in preliminary May data, while 5-year expectations have climbed to 3.4–3.5% — well above pre-pandemic norms of roughly 2.3–2.8%. The Fed's last remaining claim to credibility — that long-run expectations were anchored — is increasingly difficult to sustain with a straight face. Meanwhile, every major peer central bank is either hiking or preparing to hike in response to the same inflationary shock. One could be forgiven for concluding that the Fed's commitment to price stability has been reduced to consistent lip service.

What follows is a data-grounded examination of that contradiction, and its implications for markets, consumers, and FX… but never fear, fellow traders: a variety of trade ideas can be found at the end of this report.