Fed Up with Uncertainty
As was widely expected and priced in, the FOMC voted unanimously to maintain the benchmark federal funds rate at the target range of 4.25% to 4.50% at the May meeting. Having held pat on rates since December 2024 the central bank noted "the risks of higher unemployment and higher inflation have risen."
During his presser, Fed Chair Powell reiterated that he would not be rushed into lowering rates until there is greater clarity regarding the direction of trade policy. "There's so much that we don't know. We're in a good position to wait and see, we don't have to be in a hurry," Powell state. Powell emphasised that the central bank finds itself in a precarious position, navigating an economy that exhibits both signs of resilience, such as April's payrolls, and weakness, evidenced by the latest Q1’25 GDP estimate showing a 0.3% contraction.
Powell added that the tariffs implemented by President Donald Trump on 2 April were "substantially larger than anticipated" in the Fed's forecasts, with levies on Chinese imports now totalling 145%. The stop-start nature of these policies has created significant economic uncertainty. Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer are scheduled to meet with Chinese counterparts in Switzerland this weekend, potentially marking a shift in approach. "It seems to be we're entering a new phase where the administration is beginning talks with a number of our important trading partners and that has the potential to change the picture materially—or not," Powell observed. "It's going to be very important how that shakes out."
In terms of the dual mandate, while the labour market appears resilient on the surface, with the unemployment rate steady at 4.2% and employers adding 177,000 jobs in April, deeper data reveals emerging strains. Long-term unemployment rose with an additional 179,000 people out of work for 27 weeks or more, bringing the total to 1.7 million. Furthermore, demographic disparities persist, with unemployment at 6.3% for Black workers and 5.2% for Hispanic workers, according to recent figures from the Bureau of Labor Statistics.
Meanwhile, the Fed's preferred inflation gauge, the core personal consumption expenditures price index, rose 2.6%yoy year in March, remaining above the 2% target. Moreover, Americans now expect prices to increase by 6.5% over the next year, up from 5.0% in March, the highest one-year inflation expectation since 1981.
Consumer sentiment is strained, falling 8.4% in April, the fourth consecutive monthly decline. Americans are saving less, with the personal saving rate falling to 3.9%, one of the lowest levels since 2022. "Consumers perceived risks to multiple aspects of the economy, in large part due to ongoing uncertainty around trade policy," according to the University of Michigan's Surveys of Consumers.
The Fed has downgraded its economic outlook for 2025, lowering expectations for both GDP growth and inflation. Futures markets are currently pricing in three rate cuts this year. It is unlikely that the central bank will have sufficient data available before the July meeting to make a judgment on whether to cut or not, with tariff uncertainty likely to continue for some time.
Our view is that the Fed’s hands are tied amid heightened uncertainty. Rhetoric suggests a rate cut is further off than markets currently expect. However, it may only be a matter of time before weakening soft data filters into key economic indicators, forcing the Fed to act more decisively; at least it now has room to manoeuvre.
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