As Expected, Fed is On Hold.
The outcome of the May FOMC meeting aligned closely with expectations. The Federal Reserve chose to maintain its current policy stance, emphasizing the elevated uncertainty and the presence of risks on both sides of its dual mandate—namely, price stability and maximum employment (see updated statement below). Once again, this is in line with our latest run of FRB-US (see here).
In our view, the message conveyed is unequivocal: adopt a patient approach and refrain from premature adjustments. Economic developments will clarify which side of the mandate will take precedence. One thing is absolutely clear as we repeated many times recently: the Fed is not in a hurry (one way or the other). It will likely take another several months before the Fed can move.
As is customary, we review Chair Powell’s most salient remarks.
Statement
The updated statement reflects the most recent FRB-US model projections, indicating heightened risks on both sides of the Federal Reserve’s dual mandate. At present, it remains uncertain which set of risks—those related to inflation or those concerning employment—will ultimately prevail. It is likely that several more months will be required before the Federal Reserve is in a position to adjust policy in either direction.
Q&As
Question: Are you close to decide which side of the mandate will need urgent need?
Powell. “As we noted in our statement, we judged that the risks to higher unemployment and higher inflation are both rising compared to March. So, that is what we can say. I don’t think we can say which way this will shake out. I think there’s a great deal of uncertainty about for example, where tariff policies are going to settle out, and also when they do settle out, what will be the implications for the economy for growth and for employment. I think it is too early to know that. Ultimately, we think our policy rate is in good place as we await for clarity on tariffs and ultimately their implications for the economy”.
Comment: Hello FRB-US, once again.. In our assessment, Chair Powell’s position appears genuine. The Federal Reserve’s decision to remain “on hold” is not a strategic bluff but rather a reflection of what the Taylor rule—when calibrated using the FRB-US model—currently prescribes.
Question: It sounds like it will be a long process before you can be comfortable to act.
Powell. “[…] The labor market appears to be solid. Inflation is running just a bit above 2%. So, it’s an economy that’s been resilient and is in good shape. And our policy is sort of modestly or moderately restricted. It’s 100 basis points less restrictive than it was last fall. We think that leaves us in a good place to wait and see. We don’t think we need to be in a hurry. We think we can be patient. […] The data may move quickly or slowly, but we do think we are in a good position where we are to let things evolve.”.
Comment: The Federal Reserve remains on hold, full stop. Given the prevailing conditions, the current uncertainty is unlikely to dissipate in the near term (see general commentary below). A measured suggestion: although it is still quite early, our baseline expectation for the June Summary of Economic Projections (SEP) is that the projected path for the federal funds rate will remain broadly unchanged from March (although with more extreme outcomes for the unemployment rate and core inflation).
General comment: Chair Powell’s remarks were unambiguous and closely aligned with model-based prescriptions. Nonetheless, forward-looking commentary—and many of the questions posed—continue to reflect an expectation that the Federal Reserve is operating with a specific “threshold” in mind for labor market deterioration that would trigger rapid rate cuts.
As we previously argued (see here), the value of the so-called “Fed put” is particularly elevated in the current environment, as both sides of the Federal Reserve’s dual mandate are under pressure. According to our FRB-US simulations, if the unemployment rate remains below 5.25%, the Federal Reserve could reasonably justify additional rate hikes should year-over-year core PCE inflation exceed 4.5%. Conversely, if inflation remains below 4%, a sharper-than-baseline pace of rate cuts may be warranted—conditional on the unemployment rate rising above 5.25%.
This dual-contingency underscores why Chair Powell was necessarily vague in his forward guidance: it is not feasible to outline a clear path for the federal funds rate based solely on one side of the mandate, as developments in inflation and employment are inextricably linked. This policy tension is unlikely to be resolved by June—or even September—suggesting several more months of uncertainty and data-dependence ahead.