When High Rates Stop Talking: Rethinking Monetary Signals in a Fractured Market

But that framework may now be breaking down — and the macro data is flashing warning lights that capital allocators cannot ignore.

The Federal Reserve has held policy rates at or above 5% for more than a year, and markets largely expect this plateau to persist through Q3. Yet despite the most aggressive hiking cycle since the 1980s, inflation expectations are climbing again. The University of Michigan’s latest data shows medium-term consumer inflation expectations have surged past 6%, marking the highest reading in years.

This disconnect raises two issues. First, the CPI and PCE measures that dominate policy discussions may no longer capture the inflation narratives that actually matter to households — especially when structural shifts in housing, energy, and services outpace aggregate indexes. Second, high nominal rates no longer seem to function as credible anchors for forward expectations.

More striking still is the collapse in consumer sentiment. If the Fed’s goal was to break inflationary psychology without crushing confidence, it has failed on the latter. Sentiment remains near historic lows — worse than during the pandemic or the Great Financial Crisis — despite solid GDP and labor market data. This isn’t just a policy failure. It’s a behavioral regime shift.

For private equity investors, this has three implications. First, portfolio companies exposed to consumer demand may face margin pressure not from actual inflation, but from inflation fear. Second, LPs will increasingly price in the loss of central bank credibility — demanding higher illiquidity premiums or shorter duration strategies. And third, macro frameworks relying solely on policy rates as signals must be recalibrated. We may be in an era where behavioral metrics — like expectations and sentiment — matter more than dot plots and FOMC pressers.

The Fed hasn’t just lost control of inflation. It may have lost the narrative. For capital allocators, understanding that gap is now a source of alpha.

Sources & References

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, June 30, 2025.

Surveys of Consumers, University of Michigan, University of Michigan: Inflation Expectation© [MICH], retrieved from FRED, Federal Reserve Bank of St. Louis https://fred.stlouisfed.org/series/MICH/, June 30, 2025.

University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, June 30, 2025.