The Federal Reserve convened this week amid an atmosphere thick with economic uncertainty, deciding to hold interest rates steady as it grapples with the looming threat of stagflation. Chair Jerome Powell and his fellow Board members fessed up about their non-committal stance towards no rate cuts in this inflationary environment during this meeting. Traders are now betting on three cuts this year. The Fed’s more cautious approach is a signal of unease under increasing inflationary pressures and weak growth in the context of rising trade tensions.
Today, the Fed is faced with a much more complex economic landscape. In terms of this recalibration, the likelihood of any cut occurring in June is under 30%. Instead, most of Wall Street’s economists anticipate the next cut back to July, adding to the Fed’s focus on caution. “Uncertainty about the economic outlook has increased further,” stated the Federal Reserve in its post-meeting announcement.
During his post-FOMC news conference, Jerome Powell addressed the increasingly ominous specter of tariffs. He pointed out that these tariffs would be inflationary and serve to increase the rate of economic deceleration. “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen,” he remarked, acknowledging the challenges ahead.
Recent economic indicators present a mixed picture. Employment in the month of April, nonfarm payrolls increased by 177,000 with the unemployment rate holding stable at 4.2 percent. The Fed’s preferred measure of inflation, the personal consumption expenditures price index, has headline inflation at 2.3%. Similarly, core inflation, which excludes food and energy, is even higher at 2.6%. These numbers illustrate the persistent inflationary pressures at play even as the economy begins to act like it’s slowing down.
As of their latest report, in the first quarter, GDP is down -0.3%. This drop was due to the combination of less consumer consumption, less government spending, and a huge explosion of imports. This decline thus further calls into question how long sustained economic growth can last in the overall near term.
Though the Fed was more hawkish than expected, markets took it as upbeat news, sending the Dow Jones Industrial Average soaring by almost 300 points. This increase happened even despite some concern about how the Federal Reserve framed the risks to the economy going forward. Analysts say that members of the market are struggling to gauge between positive sentiment for ingesting future growth, against fear and panic over inflating and potential upheaval from trade.
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, noted that “the May FOMC statement in effect warns that a large trade shock is still set to hit the economy in spite of efforts by the Trump administration to deescalate.” He underlined the Fed’s perception that all risks going forward are two-sided. That indicates to us that they are still far from dovish enough for a June rate cut.