Economy faces heightened threats as central bank maintains interest rates at current levels
Fed on the Fence: Uncertainty Clouds U.S. Economic Outlook
On a Wednesday rolled over, the Federal Reserve opted to keep interest rates steady, but the folks at the helm of America's economy admitted that the risks of inflation and unemployment had nudged a whole lot higher. The sh*t's hit the fan, and it's leaving Jerome Powell and co. scratching their heads as they brace for President Donald Trump's tariffs to do their thing.
"We ain't got a clue," said Powell in a post-policy meeting presser, “It's unclear if the economy will keep cruisin' or take a nose dive under the mounting uncertainty and a possible surge in inflation."
The Fed chair's not pulling any punches. With Trump's tariffs still locking horns with political and legal battles, Powell warned that the "scope, scale, and persistence of the consequences are bloody unclear." So, what's a central bank to do? Powell shrugged, "Can't say which way this will play out."
In essence, the U.S. central bank is on the sidelines, playing a bit part in Trump's sweeping policy Agenda for now. The Fed's policy statement, whichстояd pat on the current interest rate range of 4.25-4.50%, acknowledged that uncertainty had jacked up since their March meeting, citing elevated risks of increased inflation and unemployment.
Economist Tom Simons shot straight from the hip, “The Fed's fibbin’ a bit about how much havoc’s been wreaked since March, and how bloody unpredictable things have become." He questioned the validity of Trump's tariff news, delays, trade deals, and headline-grabbing haggling on tariff exemptions, all of which have contributed to a stream of negativity in business and consumer surveys.
Dual Mandate Dilemma
The Fed's statement and Powell's responses to reporters championed the economy's resilience, with job growth continuing and the economy still rumbling along at a "solid pace." Still, the decline in Gross Domestic Product recorded in the first quarter, according to Powell, was a twisted result of a record surge in imports as businesses and households tried to stock up before the import taxes arrived.
But even that data showcases a potential dilemma Powell and co. are facing. The front-loading of imports won't get repeated, and it's uncertain whether the underlying demand and investment are starting to weaken. That's a pretty grim prognosis when it comes to future "hard" data on inflation and jobs.
The Fed's Beige Book, a collection of anecdotal reports about the economy, recently painted a grim picture, with businesses halting deals, demand dropping, and prices climbing.
"Businesses and households are panic-stricken," said Powell, “If the worry continues and nothing shifts those concerns, you'd expect it to show up in hard data."
Unfortunately, the Fed can't adapt until the outcome becomes crystal clear. "We're ready to react swiftly to economic developments," Powell stated, striking a wait-and-see posture that has become the Fed's go-to approach in the early days of the Trump administration.
U.S. stock markets staged a rally post the Fed's unity decision, ended the day in the green, and Treasury yields fell while the dollar strengthened against a basket of currencies.
Stuck in the Middle
The Fed's policy direction will rely on which of the job and inflation risks emerges or, if things go south, whether inflation and unemployment creep up together and force the Fed to determine which threat requires more attention. A soft labor market would bolster the case for rate cuts; a healthy dose of inflation would keep policy tight.
As Ashish Shah, Goldman Sachs Asset Management's chief investment officer, observed, "For the time being, the Fed is sitting tight, waiting for uncertainty to fade." He added that recent jobs data that has outperformed expectations has lent support to the Fed's preference for a hands-off approach. The Fed's policy rate has remained stationary since December, as officials work to gauge the impact of Trump's tariffs on the economy.
When policymakers last reassessed their projections in March, they anticipated that the benchmark rate would be slashed by half a percentage point by year-end. Now, it seems that the Fed's on hold, as unsettled as ever in the face of a president who's got a penchant for upending long-held economic norms.
- Jerome Powell, expressing uncertainty due to increased risks of inflation and unemployment, said, "It's unclear if the economy will keep cruising or take a nose dive under the mounting uncertainty and a possible surge in inflation."
- Tom Simons, an economist, questioned the Fed's optimism, stating, "The Fed's fibbing a bit about how much havoc’s been wreaked since March, and how bloody unpredictable things have become."
- Ashish Shah, Goldman Sachs Asset Management's chief investment officer, observed, "The Fed is sitting tight, waiting for uncertainty to fade."
- In the Fed's Beige Book, a collection of anecdotal reports about the economy, businesses have halting deals, demand has dropped, and prices have climbed.
- Powell stated, "We're ready to react swiftly to economic developments," indicating the Fed's willingness to act once the situation becomes clearer. However, he also struck a wait-and-see posture, saying, "For the time being, the Fed is on the sidelines, playing a bit part in Trump's sweeping policy agenda."
