Okay. So, three things to highlight from this FOMC meeting.
The first two I'll breeze through quickly. In fact, I can't believe that this first one is even on the list. So first Powell dusted off the word “transitory” to describe inflation and that strikes us as tricky. But the problem with it as it relates to tariffs is while most economists recognize the temporary nature of tariffs on the inflation rate, the problem is the price level. We'll see a one-time shift higher. And that is not something mainstream would define as transitory. So consider that the PSA portion of my three things to highlight.
Second, he flagged that recession risks have moved higher. Now he said it in the context of the odds moving higher from a low level, but it just added to the generally dovish tone of the press conference.
And finally, third, and I think that this really is the sort of the key part of today's meeting for us. Powell was asked about the change in the FOMC statement, which now basically says uncertainty has increased. He responded that the best thing for people to do was to go to pages 10, 11 and 12, in the Summary of Economic Projections. On those pages you find the skew of their forecast uncertainty. And there was a very big shift in uncertainty in their growth and unemployment rate forecast, and very little change to the inflation risks (i.e. the transitory idea).
So look, from our perspective, the Fed should be more focused on growth and the unemployment rate on the back of tariffs. But here's the problem. When Powell was asked about the economic backdrop as it stands today, he sounded entirely too sanguine to us. Specifically, he said something to the effect that we're not seeing weakness in things like the labor market yet, as witnessed in low layoffs. And that is true.
But that view is also fraught with challenges, because when layoffs finally show up, it's too late. Those tend to show up last. So this speaks to, from our perspective to the Fed's reaction function and compounding the reaction function challenge is, if you have inflation expectations rising and actual inflation still above target, if those things slow in already slow reaction function because they're focused on a lagging indicator like labor, then you have to recognize that the left tail is growing fatter, meaning that the skew to growth is to the downside.
