This week, the Federal Reserve will meet under similarly cloudy skies. Policymakers are already grappling with competing economic signals and under incredible external pressure, particularly from the White House. The economists and analysts all have their eyes glued on the Federal Reserve’s actions. They are especially concerned right now after President Trump publicly called for more interest rate cuts to help deal with rising inflation, which is nearing the central bank’s 2% target.
Vincent Reinhart, an economist at BNY Mellon, stated that he does not anticipate the Federal Reserve bending to Trump’s demands or breaking ranks, despite some indications of division among committee members regarding policy direction. HONOLULU — The annual meeting underway in Honolulu comes at a critical juncture. Now the Fed Chair Jerome Powell needs to use his post-meeting news conference to signal unambiguously where the committee sees the new economic reality.
Jerome Powell will be under the microscope as he explains the Federal Reserve’s reading of recent economic data. As Reinhart noted, there is significant uncertainty surrounding the Fed’s decision-making process: “The other unsatisfying part is they don’t know what they’re going to do in June.”
This is a particularly confounding external environment for the FOMC today. We know that consumer optimism is at multi-year lows and inflation expectations are at multi-decade highs. The new numbers showed a strong rate of job creation, the economy adding 177,000 new jobs in April, largely better than forecast. In Q1 of the year, gross domestic product (GDP) fell at an annualized rate of -0.3%. This latest decline is particularly worrisome given how volatile the global economy appears to be.
Tony Rodriguez, head of fixed income strategy at Nuveen, anticipates a cautious approach from the Fed: “The Fed is going to project in their statement, in their press conference, patience. Wait to see more data.” He added that there is “too much uncertainty to act right now, but prepare to act if they begin to see weakness in the employment market.”
Just a week ago, market speculation was pointing toward as many as four rate cuts beginning in June. Reinhart’s shop has had to update their expectations, and are now only expecting two cuts this year, a more cautious forecast than many had expected. This change represents a much tighter trajectory than wider market consensus for three cuts starting in the middle of the year.
Goldman Sachs economist David Mericle suggested that the September meeting may be the one that sees the first cut in rates. Rodriguez doesn’t expect much to come from this meeting in particular. He thinks this could be the moment that the Fed chooses to sit on the sidelines.
The ongoing tensions among the committee members only serve to create an even more difficult environment for Powell and his colleagues. Reinhart emphasized that external criticism tends to unify groups under scrutiny: “The White House has done Jay Powell a favor in keeping his committee together. That’s because usually, in a family, when it’s being attacked from the outside, that family is much less likely to attack one another.
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