Fed Holds Steady Despite Economic Uncertainty

So what are our key takeaways from today’s FOMC meeting? We think there are two and on balance we would say it leaned ever so slightly hawkish. And I stress the ever-so-slightly part.

First, Powell continued to express the idea of having a patient stance as tariffs flow through the economy. Second, there was a consolidation within the Fed’s dots around no cuts this year. So let's take each of those in turn.

First, not surprisingly, Fed Chair Powell again expressed the idea of patience as it relates to holding policy steady until they begin to see any tariff impact show up in the data. And we get it. But it shouldn’t be lost on any of us that it’s just entirely too early for that impact to actually show up in earnest yet; an idea that Powell rightly mentioned today. And so yeah, we have sympathy for Powell’s stance on the tariff effect; both that it’s still too early to see it in the data and that it ultimately will show up in the data which you can see clearly in their inflation forecast which they revised higher.

But my challenge to Powell is on the labor market. He did not express any notable worry around labor and the evidence you used for this was the labor force participation rate, wages, and job creation. The problem with those is they’re lagging indicators of labor. When we look at other measures of labor like layoff announcements that continue to mount, relatedly continuing jobless claims that continue to gradually rise, and a useful bolt-on to both of those, hiring rates that continue to weaken, it’s not heroic to say labor has formed many cracks. We would not be as sanguine as Powell toward labor. We think there are a number on that front of challenges there at the moment.

Second and finally, on the Fed’s expectations for policy (i.e. the dots), the median expectation is still for two cuts in 2025, but there’s now an almost equal split between those officials looking for two cuts vs. no cuts this year.

In fact, the number of officials in the no cut camp almost doubled relative to their prior forecast. This will no doubt get a lot of people talking about how it will only take a modest further shift in officials looking for no cut to get the median dot to shift down at the September meeting. And yes, that’s obviously true. But if you believe that, then whether you realize it or not, what you’re really saying is you think labor data is not going to deteriorate further from here – and given what I mentioned about labor a moment ago, we’re not so sure that’s the right take at this juncture. At a minimum, just keep in mind there’s a lot of ground to cover between now and then.