The Fed believes tariffs are fueling inflation but only in the short-term. In the long-term, the outlook on growth is more “uncertain.”
The FOMC’s official statement swapped the phrase “risks to inflation and employment are roughly in balance” with “uncertainty around the economic outlook has increased.” However, Powell clarified in his presser that the removal of the former statement was not meant to be any kind of signal.
They also announced that beginning in April, the committee will slow the pace of their monthly redemption of Treasurys from $25bn to $5bn. Remember that balance sheet reductions equate to tightening. This isn’t easing but tightening at a slower pace, which should alleviate some upward pressure on yields.
Summary of Economic Projections
This meeting also brought an updated SEP. Key points:
- Growth is slowing
- Inflation is rising in the near-term but remains anchored in the long-run
- Two more cuts are still in the forecast for 2025 (same as last time)
With no change to the number of cuts this year (two), this suggests they are really trying to ensure inflation doesn’t reaccelerate.
Although the median dot on the plot still implies two cuts this year, a few members see one or fewer than they did in December.
When Powell was asked why the projection for Fed Funds remained unchanged despite the increase in inflation, he alluded to lower growth expectations and higher inflation pressures “cancelling each other out.” If there was less concern about slowing growth, the number of projected cuts this year would have been revised lower.
“There’s something like a one in four chance of a recession at any time,” Powell said. “Recession odds have been raised somewhat but are still not high.”
On pause for longer… until something breaks.
Inflation
Powell was asked how much of inflation this year is due to tariffs and whether this a one-time price level shock.
His response: “It’s very difficult to have a precise assessment of how much is coming from tariffs. Clearly some of it… a good part of it.”
Powell wasn’t shy in pointing to tariffs as the primary driver for recent upticks in inflation readings. However, he delicately alluded to tariff inflation being only impactful in the near-term.
He stated, “I think due to the arrival of the tariff inflation, further progress will be delayed” and that progress would be delayed “until later this year.”
Is “tariff inflation” just a cool new way of saying “inflation is transitory?”
Powell also cited short-term inflation survey data and explained that most respondents are pointing primarily to tariffs as a primary driver of higher prices, but longer-term inflation expectations remain fairly flat.
The Fed will be carefully focused on inflation expectations in the near term but doesn’t believe tariffs will have a long-term impact material enough to warrant a shift in monetary policy.
Jobs
Powell parroted his sentiment at the previous meeting. 200k jobs added per month on average, 4.1% unemployment rate, and wages growing faster than inflation. The labor market is “solid.”
How are Federal layoffs impacting the labor market?
Powell: “At the national level, the layoffs aren’t significant yet.”
The impacts of recent Federal job cuts have yet to be reflected in the jobs data yet and won’t start showing up until next month.
Some projections expect DOGE to advise close to 1mm layoffs this year, which would mean 80k jobs less each month. Would a 120k per month nonfarm payrolls still be considered solid?
Market Reaction
Powell’s comments are being interpreted as slightly dovish in a shift from his last presser, but not too far from middle-of-the-road.
The 10T is down 7bps in reaction to the meeting and currently sits at 4.25%. The 2T fell 11bps and is back below 4%.
Probabilities for cuts are pointing to one more cut in 2025 than what was expected pre-meeting
- 80% chance of no change in May
- Slight increase to a 66% chance of a cut in June
- Odds of a third cut pulled back from mid-2026 to December 2025
Takeaways
The Fed believes tariff inflation is likely transitory and will focus on keeping inflation expectations anchored in the near-term.
Although inflation may tick up over the next few months, the Fed still expects to cut twice this year while the market expects three cuts.
The updated dot plot might have changed to fewer cuts but concerns over slowing GDP growth makes the Fed increasingly cautious about triggering a recession.
