CONTRIBUTORS
Nicholas J. Mastroianni, CFA
Western Asset
For the third consecutive meeting, the Federal Open Market Committee (FOMC) kept the target range for the fed funds rate unchanged at 4.25% to 4.50%. This decision was widely expected, as was Federal Reserve (Fed) Chair Powell’s cautious stance on providing definitive guidance amid extreme trade and fiscal policy uncertainty. The committee’s prepared statement included changes that conveyed a continued sense of uncertainty around the economic outlook and heightened risks of both higher unemployment and rising inflation.
At the post-meeting press conference, Chair Powell made a concerted effort to underscore the value of a “wait-and-see” approach. His prepared remarks characterized economic growth as “solid,” longer-term inflation expectations as “well-anchored,” and noted that the current state of the labor market remains “consistent with maximum employment.” Against this positive assessment of the (backward-looking) hard data, he acknowledged depressed business and consumer sentiment as well as risks to the Fed’s dual mandate posed by the ultimate “scale, scope, timing and persistence” of implemented tariffs.
Unprompted, Chair Powell raised the possibility that tariff policy could lead to a direct conflict between the committee’s inflation and labor market objectives. Rather than indicate a preference for one side of the mandate over the other, he offered a decision-making approach that would consider how far each side might be from the stated goals and how long it might take for each to return.
Throughout the press conference, reporters devoted significant attention to the idea of pre-emptive monetary policy support given the dramatic weakening of sentiment data. Chair Powell pushed back against the appropriateness of such action citing a healthy economy “shrouded” in negative sentiment, a labor market at full employment and inflation that’s been running above target for the past four years. He went on to say that “there’s no real cost to our waiting at this point” and that while the risks of higher unemployment and inflation have risen, they haven’t yet materialized.
Looking ahead, incoming data will be critically important in shaping the near-term trajectory of monetary policy. By the time of the next Fed meeting on June 18, the committee will have only one additional labor market report and two more inflation readings to consider. Given Chair Powell’s insistence that further easing would require clear evidence of deterioration in the hard data, it is difficult to foresee a resumption of the rate-cutting cycle in June absent more pronounced signs of stress among consumers and businesses. In our view, this suggests the Fed will remain on hold through the summer, as policymakers await greater clarity regarding ongoing developments in trade and tax policy.
Our base case anticipates that slowing growth and moderating services inflation will become more apparent in the hard data by the September FOMC meeting, at which point the Fed will likely be able to resume the rate-cutting cycle that it initiated last year. In the interim, high-quality fixed-income—particularly with exposure to the intermediate part of the yield curve—continues to offer attractive yields and a compelling risk/return profile. Should trade policy developments impact the hard data more quickly or more forcefully than currently expected, we believe the Fed is well positioned to respond accordingly.
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WF: 5302940