Meanwhile, the Federal Reserve’s favorite inflation gauge—the core personal consumption expenditures (PCE) price index, which excludes more volatile food and energy prices—surged from 2% in the fourth quarter of 2023 to 3.7% in the first three months of this year, easily surpassing the 2.1% inflation the Survey of Professional Forecasters predicted in February.

“This was a worst of both worlds report—slower than expected growth, higher than expected inflation,” David Donabedian, chief investment officer of CIBC Private Wealth U.S., told Fortune via email.

Donabedian argued that the “biggest setback” was the spike in core inflation, particularly in the services sector, where consumer price increases are running above a 5% annual rate. For Fed Chair Jerome Powell and his fellow central bankers, who have been hoping to see inflation fade so they can cut interest rates and boost the economy, this new data means more trying times ahead. “We are not far from all rate cuts being backed out of investor expectations,” Donabedian said. “It forces Chair Powell into a hawkish tone for next week’s FOMC [Federal Open Market Committee] meeting.”

Citi economists, led by Veronica Clark, echoed that sentiment in a Thursday note, arguing that the Fed’s favorite inflation gauge will likely rise to 2.8% when March’s data is revealed on Friday, forcing central bank officials into a more hawkish position. As a result, Clark and her team are now expecting the first interest rate cut in July, instead of June. “But we still think markets are mistaken in pricing out cuts entirely this year,” she wrote.

With fading support from fiscal stimulus and weaker spending on goods, economic growth concerns will end up weighing on the Fed as it decides whether to cut interest rates or keep them elevated. “We still think Fed cuts are coming this summer, before inflation has sustainably slowed,” Clark said.

Investors were clearly focused on the evidence of stubborn inflation in the first quarter GDP report on Thursday, however, and seemed less enthusiastic about the chances of market-juicing rate cuts coming this summer. The Dow Jones industrial average sank 1.5% by midday Thursday as investors digested the first quarter GDP report, while the S&P 500 dropped 1.1%, and the tech-heavy Nasdaq Composite plummeted 1.5%. 

After many leading Wall Street forecasters and economists recently adopted a new outlook for the U.S. economy—a “no landing” scenario with more robust economic growth and slightly higher inflation—EY chief economist Gregory Daco argued the first quarter GDP report destroyed that theory as well. “This report pours cold water on the misleading narratives of a reaccelerating economy,” he told Fortune via email.

Daco said he believes economic growth will continue to cool in the second quarter as a result of “stubborn inflation,” tight credit conditions, and weaker labor demand. “And we stress that if inflation proves to be stickier than anticipated, the downside risk to the economy from reduced real income growth, a ‘higher for longer’ Fed stance, and tightening financial conditions could be notable,” he said.

David Russell, global head of market strategy at TradeStation, even argued that the U.S. economy could be facing a nightmare economic scenario that hasn’t happened since the 1970s. 

“Stagflation is a growing risk after GDP missed and the price index surprised to the upside,” he told Fortune via email. “If inflation isn’t getting better with such weak growth, you have to wonder if the trend toward lower prices will continue.” That theory was backed up by JPMorgan Chase CEO Jamie Dimon, who told the Wall Street Journal this week that stagflation is a risk the Fed can’t ignore.

A caveat to the weak GDP data

While the first quarter GDP report was undeniably concerning, there were some caveats to the weak growth statistics. First, private domestic demand, a measure of real final sales to domestic purchases, actually rose 3.1% in the first quarter. “The 3.1% growth in real private domestic investment is encouraging, as it tends to be a strong leading indicator for future near-term GDP growth,” William Blair analyst Richard de Chazal explained in a Thursday note. 

Spending on health care, financial, insurance, and other services also continued to rise in the first few months of this year, even though goods spending slowed, showing measures of underlying demand remain robust. 

Capital Economics chief North America economist Paul Ashworth explained in a Thursday note that the U.S.’s rising imports compared with exports substantially reduced GDP growth in the first quarter as well, hiding signs of underlying economic momentum.

“Exports ended up increasing by only 0.9%, illustrating the impact of weak global demand, while imports surged by 7.2%,” he explained. “Altogether, net exports subtracted nearly 0.9% points from GDP growth, with inventories generating an additional drag of nearly 0.4% points.”

These caveats mean there was likely more underlying strength in the economy than was shown in the first quarter GDP growth figures. That’s a good sign for consumers and businesses, but it will also keep the Fed from lowering interest rates—at least “for the time being with demand as generally okay but inflation still uncomfortably high,” William Blair’s de Chazal said.