– Sees Risks Up for Both Higher Unemployment And Higher Inflation
– Powell Says FOMC May Have to Make Tough Policy Choice but No Need Now
By Steven K. Beckner
(MaceNews) – Facing heightened uncertainty about how the Trump administration’s trade and other policies will affect the economy, Federal Reserve policymakers once again marked time Wednesday, leaving short-term interest rates unchanged, despite pressure from President Trump to lower them.
Seeing a risk of stagflation – a mix of higher inflation and economic weakness — the Fed’s policy-making Federal Open Market Committee decided to await greater clarity about the direction of the economy and the appropriate setting for monetary policy. For now, they left the federal funds rate in what Fed Chair Jerome Powell called a “moderately restrictive” stance.
Powell offered little hope of near-term rate cuts, although he didn’t rule out easing at some point.
For now, the outlook is too uncertain for the FOMC to change policy in any fashion, and there is “no hurry” to change policy given that, so far, the economy and labor markets remain “solid,” he said in a press conference.
If and when it does decide it needs to lower rates, the FOMC will be able to judge the amount of easing that is needed, Powell told reporters.
But “the harder question is the timing … and when that will become clear,” he said. “And fortunately …we have our policy in a good place; the economy is in a good place. And it’s really appropriate … for us to be patient and wait for things to unfold as we get more clarity about what we should do.”
For the third straight meeting, the FOMC left the federal funds rate in a target range of 4.25% to 4.5%. — a median 4.4% — after cutting that policy rate 100 basis points over the last three meetings of 2024.
The FOMC did not issue a new quarterly Summary of Economic Projections at this meeting. The next SEP, including a funds rate “dot plot,” is scheduled for release on June 18. In their March 19 SEP, FOMC participants were anticipating a median funds rate of 3.9% by the end of the year (a target range of 3.75-4.0%), implying 50 basis points of rate cuts.
But that was before Trump launched his Liberation Day reciprocal tariff campaign on April 2. Most Fed watchers are still projecting at least two rate cuts this year.
After slowing the pace of shrinkage in its Treasury securities portolio at the March 18-19 meeting, the FOMC made no further changes in its balance sheet policy. The policy statement simply said, “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.”
The policy statement continued to describe economic activity and labor markets as “solid,” but took note of “further” increases in uncertainty. And the FOMC made a notable alteration to its balance of risks language to suggest that stagflation is becoming a greater danger.
After repeating that “the Committee is attentive to the risks to both sides of its dual mandate,” the FOMC added that it “judges that the risks of higher unemployment and higher inflation have risen.”
Referring to that new language, Powell conceded, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”
“If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close,” he continued. “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
For weeks, Powell and other Fed officials have publicly contemplated taking a “balanced approach” to making monetary policy when the Fed’s inflation and employment mandates diverge.
The so-called “balanced approach” is laid out in the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy. If the FOMC determines that its maximum employment and price stability objectives are “not complementary, it takes into account the employment shortfalls and inflation deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.”
In practice, this means that if inflation is closer to target than unemployment, the FOMC would focus first on reducing unemployment. Although the FOMC does not have a formal unemployment target, it does estimate the “longer run” rate of full employment – sometimes called the “non-accelerating inflation rate of unemployment” (NAIRU) – at 4.2%.
Powell repeatedly explained how the FOMC would balance its two goals as reporters kept asking him how the FOMC will respond if tariffs cause unemployment to rise while inflation is rising further above the Fed’s 2% target.
“This would be a complicated and challenging judgment that we would have to make….,” he acknowledged. “If the two goals are in tension, let’s say unemployment is moving up in an uncomfortable way and so on inflation….We would look how far they are from the goals, how far they are expected to be from the goals, what’s the expected time to get back to their goals.”
“We would look at all those things and make a difficult judgment and that’s in our framework,” Powell continued. “It’s always been in our thinking. We haven’t faced that question in a very long time. And so, again, difficult judgment to make.”
But the Fed chief emphasized that such a difficult choice over which goal to concentrate on is “not one that we face today, and we may never face it.”
Although the risks of both higher unemployment and higher inflation have risen, “we are not in this situation” yet, he stressed.
As things now stand, the economy is in sufficiently good shape and monetary policy is sufficiently “well-positioned” that the FOMC has the luxury of standing on the sidelines, he suggested.
“I don’t think we know” how the economy will ultimately be affected by administration policies,” he said. “If you look where we are today, we have an economy that if you look through … the distortions in Q1 GDP, the economy is growing at a solid pace, the labor market appears to be solid. Inflation is running a bit above 2%.”
“So, it’s an economy that’s been resilient and in good shape and our policy is modestly or moderately restrictive,” Powell continued. “It’s 100 basis points less restrictive than it was last fall. And so, we think that leaves us in a good place to wait and see.”
“We don’t think we need to be in a hurry,” he went on. “We think we can be patient. We are going to be watching the data. The data may move quickly or slowly. But we do think we are in a good position where we are to let things evolve and become clearer in terms of what should be the monetary policy response.”
Elaborating further on why the FOMC decided to delay any rate cuts, Powell told reporters, “we are comfortable with our policy stance. We think we are in the right place to wait and see how things evolve. We don’t feel like we need to be in any hurry. We feel it’s appropriate to be patient.”
Powell added that “when things develop, of course, we have a record of we can move quickly when that’s appropriate.“
“But we think right now the appropriate thing to do is to wait and see how things evolve,” he said. “There’s so much uncertainty. If you talk to businesses or market participants or forecasters, everyone is just waiting to see how developments play out. And then we will be able to make a better assessment of what the appropriate path four monetary policy is.”
But “we are not in that place, and as that develops,” he said, so “I can’t really give you a time frame on that.”
Powell held out hope for monetary easing at some point, but he was vague about timing.
Repeating that “our policy rate is in a good place,” he said that “leaves us well positioned to respond in a timely way to potential developments. And, depending on the way things play out, that could include … rate cuts.”
But he said it could also “include us holding where we are. We just are going to need to see how things play out before we make those decisions.”
Although much of the analysis and commentary on Trump’s tariff policies have been negative, Powell cautioned that ongoing negotiations could produce positive results.
If household and business sentiment continue to deteriorate, he said that eventually “you would expect that to begin to show up in economic data….,” but he added, “It hasn’t happened yet. And also there are things that can happen that will change that narrative ….”
All the Fed can do at this point is to watch the economic data “extremely carefully,” he said.
Powell suggested the FOMC would act quickly to counter a spike in unemployment. “If we did see … significant deterioration in the labor market, of course, that’s one of our two variables and we would look to be able to support that.”
“You would hope that it wasn’t also coming at a time when inflation was getting very bad,” he continued. “And, again, we are speculating here. We don’t know this. We don’t know any of these things. It’s very hypothetical. We are just going to have to wait and see how it plays out.”
Powell said the FOMC may have to make “a very difficult judgment” on which of its goals to focus policy on. “But the data could break in a way that it’s not.”
“I just don’t think we know that,” he continued. “The data could easily favor one or the other. And right now there’s no way to — no need to make a choice and no real basis for doing so.”
In the current uncertain climate, “it’s not a situation where we can be preemptive because we actually don’t know what the right response to the data will be until we see more data,” Powell said.
The FOMC was faced with a tricky combination of economic readings going into the May meeting.
On Friday, the Labor Department reported a larger than expected 177,000 March gain in nonfarm payrolls and said the unemployment rate stayed at 4.2%. Average hourly earnings were up 3.8% from a year earlier, a tenth less than in February.
Two days earlier, the Commerce Department released a challenging mix of data. Its advance estimate of first quarter growth in the gross domestic product showed a 0.3% annualized contraction of GDP, as imports surged ahead of large reciprocal tariff hikes and consumer spending slowed.
However, as Powell pointed out, Private Domestic Final Purchases (PDFP), a measure which excludes net exports inventory investment and government spending, grew at a solid 3% in the first quarter.
The same morning, the Commerce Department revealed March moderation of its price index for personal consumption expenditures, the Fed’s preferred inflation gauge. The PCE rose 2.3% from a year earlier, down from 2.5% in February. The core PCE, excluding volatile food and energy, rose 2.6% year-over-year, down from 2.8% in February.
However, the apparent resumption of disinflation is considered suspect, given that the March data reflect developments before the imposition of steep tariffs on imports.
Meanwhile, a volatile Wall Street was continuing to cope with a fast-changing trade picture, as the administration negotiated tariff deals with a host of U.S. trading partners, while also promising reductions in both taxes and regulations.
Further complicating the Fed’s task, Trump has kept pressure on Powell to lower rates. After calling the Fed chief a “major loser” who is “always late” cutting rates, the president said he had “no intention” of firing him.
But then Trump swung in the other direction. At a “100-day’ rally in Warren, Michigan last Wednesday, the president noted bond yields had fallen “despite the fact that I have a Fed person who’s not really doing a good job.” Grudgingly bowing to Fed independence, Trump said he “wants to be very nice…(because) you’re not supposed to criticize the Fed, you’re supposed to let him do his own thing,” But he added, “I know much more than he does about interest rates, believe me.”
Reverting to form after Friday’s employment report, Trump tweeted, “NO INFLATION, THE FED SHOULD LOWER ITS RATE!!!” And on Sunday, he called Powell “a total stiff” who doesn’t want to cut rates because “he doesn’t’ like me.”
Asked about Trump’s comments, Powell said “it doesn’t affect doing our job at all. So, we are always going to do the same thing, which is we are going to use our tools to foster maximum employment and price stability for the benefit of the American people. We are always going to consider only the economic data, the outlook, the balance of risks, and that’s it. That’s all we are going to consider. So it really doesn’t affect either our job or the way we do it.”