MNI FED WATCH: On Hold Until Tariffs Effects Materialize

The Federal Reserve will keep interest rates unchanged Wednesday for a third straight meeting and reaffirm it is well placed to wait for more clarity before reacting to President Donald Trump's barrage of tariffs this month. 

The target range for the fed funds rate has been maintained at 4.25% to 4.5% so far this year, but markets are pricing in one 25 bp cut by July and three by year-end as the the highest tariffs in a century weigh on growth. 

But with the latest inflation and employment data still looking solid, the Fed is comfortable staying on hold for now. (See: MNI INTERVIEW: Fed On Hold For A While, Rate Direction Unclear)

"The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth," Fed Chair Jerome Powell said last month. "For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance." 

SOLID DATA

GDP growth contracted in the first quarter for the first time in three years as importers raced to get ahead of tariffs, but private final domestic demand expanded 3.0%, on par with the fourth quarter of last year. 

Price and employment data have not shifted much in tone. Headline and core PCE inflation were flat in March, and 2.3% and 2.6% over the past 12 months, respectively. Hiring has averaged 155,000 payrolls a month over the past three months and the unemployment rate is unchanged at 4.2%. 

Extreme uncertainty about the outcome of tariff negotiations and trade policies’ ultimate effects on inflation and growth have made it difficult to pin down Fed policy this year. 

Former St. Louis Fed President James Bullard told MNI he continues to see a few rate cuts by year-end as tariffs drag down growth, while former Chicago Fed President Charles Evans warned the FOMC won't be able to count on price effects being temporary, raising the bar for additional monetary easing. 

But if the economy were showing real signs of fraying, then the Fed would probably ease more aggressively than markets are currently pricing in, Evans said. (See: MNI INTERVIEW: A Few Fed Cuts Likely By Year-End - Bullard and MNI INTERVIEW: Inflation Uncertainty Deters Fed Easing -Evans)

MARKETS CALM

Researchers and investors are still digesting the unusual combination of a fall in the dollar, bonds and stocks and high volatility in the first half of April that prompted speculation of Fed intervention. But the central bank in its semiannual Financial Stability Report said market functioning was generally orderly. (MNI INTERVIEW: US Bond Selloff A 'Stern Warning' To Fed -Stein) 

Stock and bond markets have now recovered to levels close to where they were before the reciprocal tariffs announcement as investors wait to see whether countries line up to make new trade deals with Trump.