The Fed's Balancing Act & Stagflation Concerns

Elizabeth Prindle |

Last week, Federal Reserve Chairman Jerome Powell announced the Fed’s decision to cut interest rates by a quarter-point in September. This move underscores the delicate balancing act the central bank faces—managing both rising inflation and a weakening labor market. The combination of slower growth and higher prices has fueled growing discussions of stagflation, a term that recalls one of the more difficult economic periods in U.S. history.

Many of us remember the last major stagflationary period, which began during the Jimmy Carter administration and extended into Ronald Reagan’s presidency. That era was marked by economic turbulence:

  • Mortgage rates soared, peaking at 18.63%.
  • The unemployment rate climbed to over 10%.
  • GDP growth contracted sharply, with one quarter hitting -7.9%.

A mix of factors—including the 1973 oil embargo—drove this downturn. Ultimately, it was tamed by then-Fed Chairman Paul Volcker, who made the bold move of raising the federal funds rate to 20% in 1981. While today’s conditions are not nearly as extreme, the memory of that period remains a cautionary reminder.

👉 For more perspective on navigating uncertainty, see our post on Investing Through Uncertain Times .

A Reminder About Market Valuations

The stagflation conversation matters because Powell also noted that the stock market may be overvalued on a historical basis—a point echoed in a recent Barron’s article:

“U.S. stocks are trading at new heights. They’re also asking investors to pay the most for future earnings in more than two decades, adding a new element of risk to the market’s rally… The current price-to-earnings ratio of around 23 times is matched only by a brief period in the post-Covid bull market and the tech bubble of the late 1990s.”

Today’s forward price-to-earnings ratio of ~23 adds a layer of risk. Historically, similar overvaluations have been followed by difficult stretches, such as the 1973 bear market, where inflation wiped out all of the S&P 500’s nominal gains through 1981—leaving investors with negative real returns.

That said, while valuations are high, history also reminds us that markets can remain overvalued for extended periods. This is why we continue to believe that market timing is a fool’s errand.

👉 Learn more about how we view these dynamics in Market Uncertainty and FOMO .

 

 

This website is informational only and does not constitute investment advice or a solicitation. Investments and investment strategies recommended in this blog may not be suitable for all investors. SAS Financial Advisors, LLC and its members may hold positions in the securities mentioned within this newsletter. SAS Financial Advisors, LLC is not responsible for any third-party content referenced.

The SAS Newsletters are posted weekly on the SAS Blog: https://www.sasadvisors.com/blog