Macro Matters: Wellington’s Medeiros on the Fed and 2027…

PodcastFICC FocusMike MedeirosOct 15

Medeiros sees strong recent nominal growth supporting earnings, but expects fiscal policy to turn contractionary around mid-2027 and sees risks to growth and earnings that markets may underprice. Above-target, broadening inflation could require more Fed tightening, while higher yields may be starting to tighten financial conditions. He also sees rich equity valuations and persistent headwinds for traditional assets, alongside a structural case for real assets, though not necessarily over the next three to six months.

Monetary Policy Inflation Fiscal Policy Economic Growth Market Valuations Interest Rates

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Key Takeaways

Medeiros says nominal GDP growth above 6% year to date, supported by easier fiscal policy, banking and financial-services deregulation, and lower trade-policy uncertainty, has supported near-term earnings. He expects fiscal policy to turn contractionary around mid-2027 and the economy to fall below trend in about a year, creating a gap with market expectations for 2027 earnings and little priced-in slowdown risk.

Medeiros says inflation has picked up and broadened, and warns that $100 oil could lift household and business inflation expectations and feed into core inflation. If core inflation retains a 3% handle and financial conditions do not tighten enough, he expects the Fed may need to tighten more than markets anticipate, with additional tightening weighing on the real economy.

Medeiros says the One Big Beautiful Act embeds fiscal drag in 2027 through Medicaid and SNAP benefits, while the current fiscal easing has supported growth. He also warns that a garden-variety recession could add 2–6 percentage points to the deficit, potentially pushing it to 8–10% of GDP when debt is already above 100% of GDP.

GEO-POLITICS

AI Regulation Risk — Medeiros argues that market concern about AI regulation could grow if Democrats outperform, potentially reaching 54 Senate seats and gaining in state and local elections. He notes that the Trump administration can use executive-branch tools without Congress, but sees state and local election outcomes as potentially important.

“And so my bias would be if the Democrats outperform, right, if we're talking 54 seats in the Senate, some of the state and local elections, particularly the governor's races…”—

ECONOMY

Nominal Growth — Medeiros says nominal GDP grew by more than 6% year to date and expects further growth in Q3. He expects that growth to show up in upcoming earnings reports.

“Nominal GDP year to date has grown over 6%, it's probably gonna grow even more in Q3, I would expect that to be encapsulated in the upcoming earnings reports”—

Fiscal Shift — Medeiros says fiscal policy eased by about 1% of GDP, alongside banking and financial-services deregulation and lower trade-policy uncertainty. He says these conditions supported nominal GDP and earnings in the near term, but expects fiscal policy to turn contractionary around the middle of 2027. He sees a gap opening between his nominal-growth outlook and market expectations for 2027 earnings.

“Fiscal policy eased to the tune of about 1% of GDP, deregulation across banking and financial services has been full on and trade policy uncertainties lower.”—

Inflation Pressure — Medeiros says inflation has been above target and has more recently picked up and broadened, leaving a credible case for further Fed rate hikes. He expects those trends to continue into 2027.

“And as you know, that's a really important mechanism through which monetary policy impacts the real economy and I think given inflation's been above target for 5…”—

MARKETS

Treasury Selloff — Medeiros describes the Treasury selloff as being in its later stages, with 10-year yields around 5.35% and 30-year yields around 5.70%. At those levels, early signs of restrictive policy were appearing in several markets. He suspects financial conditions have started tightening and expects them to be tighter in three months.

“Yeah. You know, I think we're in the later stages of the bond... Of the treasury market sell off…”—

FORECASTS

Midterm Yield Peak — Medeiros says Treasury yields peaked around the midterms in 1994, 2018, and 2022, when elections shifted government to divided control. He thinks a similar shift from Republican control to divided government could mark a local peak in Treasury yields this time.

“Treasury yields peaked plus or minus a week right around the midterms. And all of those midterm elections represented shifts from one party control to divided government…”—

Oil Price Scenarios — Medeiros says the effect of divided government on oil prices is unclear. Escalation of the Iran conflict could push prices higher, while inflation and affordability concerns could increase the incentive to bring them down.

“You can make the case that in a shift to divided government, there's a acceleration in the conflict with Iran where oil prices go up, and at the same time…”—

Equity Return Outlook — Medeiros says risk-asset valuations are fairly rich. His baseline is for equity returns over the next one to three years to be lower than over the past decade, with cyclical fluctuations.

“So I would say on that point, right, our starting point is fairly rich valuations for risk assets. So let's talk maybe one to three year horizon…”—

Nominal Growth And Earnings

Medeiros says strong nominal GDP growth has supported revenue and earnings, but shifting Fed and fiscal policies could open a gap between economic growth and 2027 earnings expectations.

2027 Policy And Earnings Risks

Medeiros expects fiscal policy to turn contractionary around mid-2027 and argues that tighter policy could put earnings growth expectations at risk.

Treasury Yields And Fed Tightening

Medeiros sees the Treasury selloff nearing a late stage, but says higher yields are only beginning to tighten financial conditions as broadening inflation may require further Fed hikes.

Growth And Recession Risks

Medeiros says the Fed may need to tighten more than markets expect, which could push growth below trend and expose markets to risks that are not fully priced.

Fed Communication And Inflation

Medeiros says the Fed is emphasizing its 2% inflation goal while limiting forward guidance, and may keep tightening unless core inflation returns to a two-handle.

Midterms And Treasury Yields

Medeiros says divided government could mark a local peak in Treasury yields, while election outcomes may affect AI regulation, oil prices, and fiscal policy.

U.S. Deficits And Debt

Medeiros views a bipartisan reversal of fiscal drag as a risk case, but remains concerned that high debt and deficits could become more problematic after a recession.

Real Assets And Portfolio Returns

Medeiros expects lower equity returns and persistent headwinds for Treasuries, while seeing a structural case for real assets despite uncertainty over near-term performance.