The FOMC seems willing to be patient until it becomes clear through hard data that they need to shift their approach
As expected, the Federal Open Market Committee (“FOMC”) maintained the fed funds target rate at a range of 4.25% to 4.50% and made no additional changes to the runoff of the balance sheet following the announcement in March to slow that pace; the vote was unanimous. Changes to the statement released prior to the press conference included an acknowledgment that “uncertainty about the economic outlook has increased further” and that the Committee “judges that the risk of higher unemployment and higher inflation have risen.” There was also a nod to the recent Q1 GDP print, which came in at -0.3%, with the statement noting that “although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.”
During the press conference, Federal Reserve Chairman Jerome Powell reiterated a similar stance to those shared by Fed officials during the weeks prior to the blackout. He admitted that while the Fed is worried about the potential for higher unemployment and higher prices, it is too soon to act on either based on the divergence between hard and soft data. Powell believes that monetary policy is in a good position and that while the Fed “can move quickly when that’s appropriate”, the bar seemed to be set a bit higher today for a June rate cut. This was reflected in expectations, which declined to less than 25% after today’s announcement and press conference.
Not surprisingly, yields were little changed following the meeting. As for the equity markets, they were lower following the release of the statement; however, the release coincided with a comment from U.S. President Donald J. Trump who indicated that he is unwilling to roll back the commitment to 145% tariffs on Chinese goods. This comes ahead of important meetings in Switzerland between U.S. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer and China Vice Premier He Lifeng. The potential for U.S.-China rapprochement is likely to move back to the front burner over the coming weeks, particularly as earnings season wraps and macroeconomic and policy activity drives market activity.
In short, following today’s statements, it is apparent in our view that the FOMC, led by Powell, are willing to be patient until it becomes clear through hard data that they need to shift their approach. The delicate balance between unemployment and inflation is driving this hesitancy as it becomes increasingly difficult to offset employment weakness through monetary stimulus if supply chain dislocations are transmitting to higher prices. Much like companies and consumers, the Fed will need to react to policy changes in real time over the next few months while anchoring to its longer-term goals. With the 90-day delay on tariffs set to expire in early July and multiple tax bills weaving their way through Congress with a target of July 4th for agreement, there is likely to be much more for the Fed to grapple with in the next two meetings.
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