MNI: Fed Report Flags Tariff Uncertainty, Powell To Testify

The Federal Reserve's latest Monetary Policy Report to Congress released Friday sounded an upbeat note on the state of the economy, arguing the current stance of monetary policy leaves the central bank well positioned to wait for more clarity on the outlook for inflation and economic activity, and to respond in a timely way to potential economic developments. 

"The effects on U.S. consumer prices of the increase in import tariffs this year are highly uncertain, as trade policy continues to evolve, and it is still early to assess how consumers and firms will respond," the Fed report said. "Although the effects of tariffs cannot be observed directly in the official consumer price statistics, the pattern of net price changes among goods categories this year suggests that tariffs may have contributed to the recent upturn in goods inflation."

The report, which comes ahead of next week's testimony before Congress by Fed Chair Jerome Powell, said inflation has continued to moderate this year, though it remains somewhat elevated. The labor market is in "solid shape," with a "moderate pace of job gains so far this year and the unemployment rate at a low level." Although growth in real GDP is reported to have paused in the first quarter, growth in private domestic final demand was moderate, reflecting a modest increase in consumer spending and a jump in capital spending, the Fed report said. 

"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks," the central bank told Congress. (See: MNI INTERVIEW: Fed Will Face ‘Tough Calls’ In H2-Holtz-Eakin) 

"Alternative measures that attempt to reduce the influence of idiosyncratic price movements on inflation in other ways have declined but remain elevated and suggest inflation rates will run somewhat above 2% in the coming months." 

The Fed kept interest rates on hold this week while revising up its forecasts for inflation this year and next.