Fed Pauses as Expected While Acknowledging Inflation and Unemployment Risks Have Risen

Meeting Highlights 

• As expected, the Fed kept the funds rate range unchanged at 4.25% – 4.50%, and the statement acknowledged the twin tariff risks of possibly higher inflation and unemployment have risen. Other than that, there was little in the way of substantive changes to the statement from March. The decision was unanimous.

 

• In relation to statement changes, it noted, “Uncertainty about the economic outlook has increased further.” The prior statement mentioned that “uncertainty around the economic outlook has increased.” They then added that the Committee “judges that the risks of higher inflation and higher unemployment have risen.” This is an added concern from the March statement and no doubt reflects the increased risks from tariffs and that stagflation is now a risk. They also acknowledged that “…swings in net exports have affected the data.’’  This is recognition of the front-running of imports during the first quarter and reflects the Committee’s intent to look through first quarter GDP weakness.

 

• Since this was not a quarter-end meeting there were no updated economic or rate forecasts. The only information coming from the meeting is the attached statement and the post-meeting press conference where Powell will add more color to today’s decision.

 

• Futures pricing prior to the announcement had odds of the first rate at 92% for the July meeting, with the 2025 year-end rate at 3.55%, implying three 25bps cuts by year end (July, Sept. Dec.).  Those futures levels continue to generally hold in early post-meeting trading.

 

• In the March FOMC rate and economic forecast, the Fed saw core PCE ending 2025 at 2.8% then dropping to 2.2% in 2026 and finally hitting the 2% in 2027. Core PCE currently stands at 2.6%. Having already dipped below the Fed’s year-end inflation forecast speaks to the expectation of higher price pressure coming from tariffs.

 

• While so-called soft survey data has been flashing economic warning signs for a while, the hard data has yet to confirm it, and FOMC members have generally been aligned, with a couple notable exceptions, in wanting to see evidence of slowing in the hard data before shifting back to cuts. Investors are hoping to hear from Powell’s press conference today on whether that requirement has softened some or remains firmly in place. Early press conference comments reflect a continued reliance on policy being, “well positioned to respond in a timely way to potential developments.”

 

• In summary, the Fed delivered a somewhat status quo message while recognizing that there is now increased risk from inflation and unemployment (i.e., stagflation risk). They also indicated a willingness to look past first quarter weakness, indicating that, “economic activity continued to expand at a solid pace.” With the labor market and economy still exhibiting resilience, the Fed seems committed to getting inflation closer to the 2% target before adjusting policy. The risk we, and the market, see is that the anticipated slowing in the economy stemming from tariff fallout could happen quicker than the Fed is anticipating making the decision to stand pat harder to justify and risks a more substantive slowing.

 

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Dot Plot from March FOMC Meeting

Source: Bloomberg

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