– Powell: Fed ‘Well-positioned’ To Await Data on Tariff Inflation Impact
By Steven K. Beckner
(MaceNews) – Despite heavy pressure from President Trump to lower interest rates, the Federal Reserve left them unchanged Wednesday, as expected, and Fed officials gave Trump little encouragement for future rate cuts in the near term.
Participants of the Fed’s policy-making Federal Open Market Committee made no changes to their expectations for rate changes for the rest of this year, and they actually projected higher rates over the next two years than they had previously.
As in March, they anticipated 50 basis points of cuts in the federal funds rate before the end of 2025 but reduced the amount of easing they expect to do in 2026 and 2027.
Fed Chair Jerome Powell reiterated that he and his fellow monetary policymakers believe they need to take a cautious, patient, data-dependent approach to adjusting the short-term rates they control.
In its policy statement, the FOMC again emphasized the high level of uncertainty about the economic outlook, but after warning of increased stagflationary risks in its May 7 statement, the FOMC reverted to simply saying it sees “risks to both sides of its dual mandate.”
Without explicitly saying the Fed is in “no hurry” to cut rates, as he has done in the past, Powell sent a very similar message in his post-FOMC press conference. With tariffs expected to increase inflation and delay achievement of the Fed’s 2% target, he said the FOMC can afford to wait before cutting rates because the economy and the labor market are “solid” and “in a good place.”
“The labor market is not crying out for a rate cut,” he asserted.
Powell repeatedly said the Fed is “well-positioned” to monitor risks to both sides of its dual mandate of price stability and maximum employment and respond appropriately to economic developments. In particular, he said he and his colleagues want to see more data showing the effects of tariffs on inflation before considering rate cuts.
For a fourth straight meeting, the FOMC held the funds rate steady in a target range of 4.25% to 4.5% after lowering that policy rate three times by an aggregate 100 basis points in the final three meetings of 2024.
In their revised, quarterly Summary of Economic Projections, the 19 FOMC participants again projected that by year’s end, the funds rate will be at a median 3.9% (a target range of 3.75% to 4.0%), implying two 25 basis point rate cuts sometime during the remainder of 2025. That is identical to the projection contained in their last SEP “dot plot,” published on March 19,
However, the funds rate is projected to end 2026 at 3.6%, up from 3.4% in the March SEP. It is expected to end 2027 at 3.4% — up from 3.1% in March.
The FOMC made no change in its balance sheet strategy. After slowing the pace of shrinkage in its Treasury securities portfolio at the March 18-19 meeting, the FOMC simply said, “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.”
The FOMC held its mid-year meeting in a challenging, not to say messy, atmosphere. Encouraging data on inflation mixed with signs of economic cooling and labor market softening seemed conducive to rate cuts, but the picture has been complicated by the outbreak of hostilities between Israel and Iran.
In its policy statement, the FOMC again described economic activity and labor market conditions “solid” and once more called inflation “elevated.”
But there were some noteworthy changes to the statement. After saying that “uncertainty about the economic outlook has increased further” in the May statement, the FOMC now says “uncertainty about the economic outlook has diminished but remains elevated.”
The latest statement repeats that ‘the Committee is attentive to the risks to both sides of its dual mandate, but it deletes the stagflatinary May assertion that “the risks of higher unemployment and higher inflation have risen.”
FOMC participants left unchanged at 3.0% their estimate of the “longer run” or neutral funds rate.
The new funds rate “dots” were accompanied by revised economic forecasts.
The officials now forecast that PCE inflation will end 2025 at 3.0% – compared to the 2.7% forecast in March. Core PCE inflation is expected to close out this year at 3.1%, compared to 2.8% in March. PCE inflation is forecast to fall to 2.4% in 2026 and to 2.1% in 2027 – less disinflation than forecast in March.
While increasing their inflation forecast, FOMC participants cut their GDP growth forecast from 1.7% to 1.4% — four-tenths below their 1,8% estimate of the longer run GDP growth rate (or “potential”). The unemployment rate is forecast to rise to 4.5%, up from 4.4% in the March SEP.
Powell blamed both the increased inflation forecasts and the forecast of slower growth and higher unemployment on higher tariffs, although he said business sentiment about tariffs has become “more positive and constructive” than it was when the FOMC last met.
Although some of the FOMC participatns projected no rate cuts at all this year, Powell made clear the consensus is for a return to rate cuts or “normalization,” but that the timing is uncertain due primarily due to uncertainty about the extent of the tariff impact.
Resisting White House pressure to cut rates immediately, the Fed chief strongly indicated he will not be rushed.
Powell did not reiterate past declarations that the Fed is “in no hurry” to cut rates, but he repeatedly told reporters that the Fed can afford to keep its “modestly restrictive” monetary policy for an indefinite period while it awaits more evidence that the economy is on track back to “price stability,’ which the Fed defines as 2% inflation.
After pointing to “solid” growth and employment, he opened his press conference by saying, “We are well positioned to wait to learn more before considering any adjustments to our policy stance.”
Turning Trump’s calls for rate cuts back on the President, Powell blamed the unknown impact of tariffs for the delay in rate cuts.
“The size of the tariff effects, their duration and the time it will take are all highly uncertain,’ he said. “So that is why we think the appropriate thing to do is to hold where we are as we learn more. And we think our policy stance is in a good place where we’re well-positioned to react to incoming developments.”
Powell returned to that phraseology throughout his press conference, while maintaining that there is nothing in the economy that shows any urgency to lower interest rates.
Asked about the job market, he said, “look at labor force participation, look at wages, look at job creation. They’re all at healthy levels now. I would say you can see perhaps a very, very slow continued cooling. But nothing that’s troubling at this time….”
“So overall, again, the current stance of monetary policy leaves us well-positioned to respond in a timely way to economic developments for now,” he continued. “And we’ll be watching the data carefully.”
Powell all but ruled out rate hikes and strongly indicated that the Fed’s next move will be to cut rates, but was purposefully vague about the timing of rate cuts.
“It’s very, very hard to say when that will happen,” he said. “We know the time will come. It could come quickly. It could not come quickly.”
“As long as the economy is solid, as long as we’re seeing the kind of labor market that we have and reasonably decent growth, and inflation moving down, we feel like the right thing to do is to be where we are, where our policy stance and learn more,” he added.
Powell seemed to suggest that rate cuts will only come considerably later in the year.
“(W)e feel like we’re going to learn a great deal more over the summer on tariffs,” he said. “We hadn’t expected them to show up much by now and they haven’t, and we will see the extent to which they do over coming months. That’s going to inform our thinking. In addition we’ll see how the labor market progresses.”
“At some point it (a justification for rate cuts) will become clear,” Powell continued. “I can’t tell you when that will be.”
“We’ll be watching the labor market carefully for signs of weakness and strength and tariffs for signs of what’s going to happen there….,” went on. “So I think we don’t yet know with any confidence where they will settle out….”
Powell said “we will make smarter decisions if we wait a couple of months or however long it takes” to see the actual effect of tariffs on inflation.
Reverting to language he and other Fed officials often used last year in the run-up to the Fall rate cuts, Powell stressed the need for greater “confidence” that inflation is on course to 2%.
Asked what it will take for the FOMC to cut rates, he replied, “It will take confidence that inflation is coming down. Without tariffs that confidence would be building. If you see what’s happening with non-housing services and housing services, those are coming down nicely now.”
“We have to learn more about tariffs,” he continued. “I don’t know what the right way for us to react will be. I think it’s hard to know with any confidence how we should react until we see the size of the effects. Then we can start to make a better judgment…..”
But returning to his unhurried approach, Powell added, “I think we can take the time to do that because unemployment is 4.2%. Wages are moving up. Real wages are moving up at a healthy clip now. And inflation is 2.3% headline inflation over a 12-month basis. So it’s a good economy and a solid economy with decent growth.”
Besides, in contrast to what Trump contends, the Fed chief said, interest rates are “not very high. Policy is modestly or moderately, probably modestly restrictive. If you look at the economy it’s not performing as though it were performing under very strict monetary policy, very restrictive. I would say modestly restrictive.”
As reporters continued to probe for the likely timing of rate cuts, Powell remained vague.
“(W)hat we’re waiting for to reduce rates is to understand what will happen with the tariff inflation, and there’s a lot of uncertainty about that….,” he said. “(E)veryone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs….”
“(U)ltimately, the cost of the tariff has to be paid and some of it will fall on the end consumer,” he went on. “We know that…. So we know that’s coming, and we just want to see a little bit of that before we make judgments prematurely.”
Going against Trump’s urgent call for rate cuts to juice the economy, Powell said, “the economy seems to be in solid shape. So the labor market’s not crying out for a rate cut.”
And business sentiment is less dire than it was, he noted. “So, again, we think that our current stance of monetary policy is in a good place.”
Until very recently, a variety of Fed officials were expressing hesitancy about resuming rate cuts until greater clarity emerged about the economic impact of trade and other Trump administration policies, although some signaled a greater willingness to ease monetary policy in coming months.
Despite rising inflation expectations and other worries, a mix of favorable price and employment data lately raised market hopes for rate cuts. Most recently, it was reported that the consumer price index moderated to a 0.1% increase in May, while retail sales, building permits and industrial production declined. Although the unemployment rate remained historically low at 4.2% last month, non-farm payroll gains have slowed, and other indicators have suggested deterioration in labor market conditions.
Moreover, the outbreak of war between Israel and Iran late last week introduced a new set of anxieties that further aggravated uncertainties about the economic and policy outlook. Depending on how that conflict proceeds, monetary policy options could change. Some speculate that the war-related oil price spike, by hurting demand, boosts odds of Fed rate cuts. But there are alternate scenarios as well, underscoring the unusually high level of uncertainty and discomort for the U.S. central bank.
Lurking not far in the background are financial market turbulence and concerns about mounting U.S. indebtedness and the international status of the U.S. dollar, as Congress limps toward passage of a controversial tax and spending package.
Powell said there was little discussion of fiscal policy around the FOMC table.