MNI FED WATCH: Rates Steady As Tariffs Lift Inflation Forecast

Federal Reserve officials are expected to hold interest rates steady Wednesday for a fourth straight meeting and mark up their inflation and unemployment forecasts as President Trump's tariffs begin eating away at growth. 

Fed Chair Jerome Powell and his colleagues maintain that monetary policy is "in a good place" to wait until later in the year before deciding on any policy moves. Since the FOMC last met in May, the U.S.-China trade clash had de-escalated, re-escalated and de-escalated again, while the 90-day pause on the April 2 "reciprocal tariffs" is set to expire next month.  

The impact on prices from tariffs has so far been limited, with muted CPI and PPI reports in May taking markets by surprise. But Fed officials are girding for a second-half ramp-up as firms run through their pre-tariff inventory build-up and consumers feel the sting of a higher 50% duty on household appliances with steel parts and surging oil prices after Israel's strike on Iran. 

“They have the luxury of waiting for another meeting but after that they start having some real tough calls,” former White House economist Douglas Holtz-Eakin told MNI. (See: MNI INTERVIEW: Fed Will Face ‘Tough Calls’ In H2-Holtz-Eakin)

SINGLE CUT?

With inflation likely to be marked up by several tenths, the FOMC's June economic projections will likely show growing support for one cut by year-end, down from the median two cuts penciled in at the March meeting. Nine officials wrote down two cuts in March, four wrote down one, and another four had no cuts for the year.  

Although growth has held up in the first half, forward indicators point to deterioration. Both factory and services ISMs were below 50 and falling in May, and firms surveyed by regional Fed banks indicate they're well aware of the demand trade-off if they choose to pass through the full cost of tariffs. (See: MNI INTERVIEW: Fed Surveys Track Which Firms Will Raise Prices)

Recent signs of softening in the U.S. job market will likely not provide enough justification for more cuts this year, ADP chief economist Nela Richardson told MNI. Employers added 139,000 jobs last month, close to the three-month moving average, and the unemployment rate was steady at 4.2%. (See: MNI INTERVIEW: Hiring Softer But Not Enough For Fed Rate Cuts)

BALANCED APPROACH

With both sides of the Fed's mandate under threat, Powell has promised to balance the two goals by considering "how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close." 

The Fed's obligation is to make certain that a "one-time increase in the price level does not become an ongoing inflation problem," Powell said, and stable long-term inflation expectations are key to achieving that goal. (See: MNI INTERVIEW: Inflation Expectations Troubling-Gorodnichenko)

Unless the economy weakens significantly, there is little reason for the Fed to move quickly until it is clear that the inflation effects are temporary, and that debate is far from settled.