PREAMBLE
The Federal Reserve Will Remain on Hold, Regardless of Circumstances. Recent statements from Federal Reserve officials, as well as the minutes from the most recent Federal Open Market Committee (FOMC) meeting, underscore the institution’s persistent concern regarding inflationary pressures and expectations. These communications collectively convey a cautious stance toward monetary policy adjustments in the near-term. A particularly illustrative example can be found in the remarks of Federal Reserve President Neel Kashkari (here): “Given the high inflation we’ve experienced in recent years and the risk of unanchoring long-run inflation expectations, I believe our first priority must be keeping long-run inflation expectations anchored.”
This development comes as no surprise to us for two reasons: (i) in the New Keynesian framework, expectations are everything, and (ii) the models are very unfriendly in this respect right now. We reiterate the message we have conveyed in recent weeks: the Federal Reserve is effectively in a holding pattern until there is greater clarity regarding which side of its dual mandate will take precedence. If anything, current dynamics suggest that the likelihood of an interest rate increase outweighs that of a cut, although in the end we expect neither a cut nor a hike. It will likely take several months of incoming data before a clearer policy direction emerges.
Exceptionally Weak Report, Significant Forecast Miss, Conflicting Signals.
The March Consumer Price Index (CPI) release was notably weak, representing one of the largest month-over-month (MoM) forecast misses in our tracking history (see Table 1 for details). More strikingly, despite having the full report in hand, this release stands out as one of the most challenging to interpret in recent memory.
At a sectoral level, the forecast deviation is largely attributable to three highly volatile categories: lodging away from home, airfares, and medical commodities. All other components were either in line with expectations or came in higher. However, our internal models (detailed below) suggest that the weakness extends beyond these isolated categories. Under normal conditions, we might infer that a structural shift in inflation dynamics is underway. Yet, given the current environment—characterized by conflicting signals and the looming introduction of new tariffs—such a conclusion cannot be responsibly drawn at this time. We therefore require additional time and data to properly assess the evolving situation and remain cautious in any directional assessment.
CPI/PCE Translation: Based on the latest CPI data, we currently estimate that core Personal Consumption Expenditures (PCE) inflation will register a 0.15% MoM increase (seasonally adjusted) for March.
Reaction to the incoming data. In typical conditions, we would respond to such a report by adjusting our near-term forecast upward to compensate for the unexpected weakness in volatile components. However, after an initial assessment, we see no immediate justification for a revision, as our current forecast already reflects a relatively elevated inflation path. At this stage, we maintain our projection for April core CPI at 0.42% MoM (seasonally adjusted). That said, this estimate should be regarded as even more tentative than usual, given the rapidly evolving nature of both economic data and policy developments.
Models Insights: Medium-Term Lower. Our modeling framework signal substantial uncertainty. Tail risks remain pronounced on both ends of the distribution. The Common Inflation (CI) model indicates the weakest shared inflation component observed over the past four years. Concurrently, our medium-term inflation model has been revised downward, influenced both by today’s CPI release and by policy signals emerging from the White House in recent days.
Conclusion: A Landscape of Extreme Uncertainty. The macroeconomic data landscape is as conflicted and disorderly as it has been in recent cycles. Signals are contradictory, revisions across models—both for inflation and the labor market—are frequent and material. This environment offers little clarity for forward policy guidance. As a result, we believe the Federal Reserve will remain in a holding pattern until at least June, though a more realistic timeline likely points to September—barring the emergence of a significant financial disruption.
Table 1. Updated MoM (sa) UnderlyingInflation real-time forecast errors in the last 6 months.
A PDF containing all relevant CPI charts has been posted. You can download it here.
Evidence from the distributions
The distribution remains unfavorable and inconsistent with the target. This month, the distribution has a thicker left tail and remains very different than pre-Covid (see ridge plot). The median (Figure 2) ticked down. As shown in Figure 1, the overall picture remains unchanged: the distribution continues to differ from the pre-Covid pattern, with little progress over the past nine months. We will monitor closely the distribution to assess the impact of the upcoming tariffs.
Figure 1. Kernel of CPI excluding food and energy items changes (MoM %, a.r.)
Note: the Figure shows the fitted Kernel (Epanechnikov) distribution of MoM percent changes at annual rate of CPI prices excluding food and energy items.
Figure 2. Median (core) CPI metrics
Note: the Figure shows the median (MoM %, a.r.) of the distribution of CPI prices changes excluding food and energy items (left panel) and the YoY (right panel).
Evidence from our CI-C model
Our CI model estimates that, excluding idiosyncratic shocks, the common component is very, very weak. Figure 3 illustrates the decomposition of the MoM core CPI into “common” and “idiosyncratic” components. This month, the model estimates that the common component increased by 7bps (one of the weakest reading of the last 4 years), while the idiosyncratic shock was small (-2bps). The 3m/3m of the “common” component (Figure 4) stands at 2.9%. If tariffs were not coming, we would now change our message to: “something is likely changing for inflation”. We remain careful because today’s reading can be influenced by the coming tariffs. In other words: we need time.
An Excel file containing the results shown in Figure 3 and 4 can be downloaded here.
Figure 3. Contributions to MoM changes of CPI excluding food and energy items (CI model)
Note: the Figure shows the decomposition of the MoM percent changes of CPI prices excluding food and energy items. The contributions are estimated using our CI model.
Figure 4. Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
Note: the Figure shows the 3m/3m at annual rate (green line), the 6m/6m at annual rate (red line), and the YoY (blue line) of the “common component” estimated using our CI model.
Implications for the medium-term forecast of core PCE price inflation
The medium-term is revised down. Today’s data and yesterday’s news from the White House had a material impact on the medium-term forecast, as we revised down the size of the shock to core import prices.
The model’s latest Q4/Q4 forecasts are as follows: 3.8% in 2025, 3.9% in 2026, and 3.1% in 2027. This forecast remains above the latest SEP.
Figure 5. “Main” Phillips curve model forecast, core PCE price inflation (YoY, %).
Note: the figure shows the latest run of our “main” Phillips curve model. The confidence intervals (C.I.) are estimated using quasi-out-of-sample methods (estimate the model over a sub-sample, forecast, and calculate the root mean squared forecast errors).