Wait and See.
We anticipate the May 2025 FOMC meeting outcome will reflect a “wait and see” stance. Recent data have been notably mixed (weak soft data but no clear deceleration of the labor market and no pick up in inflation, yet), making clear signals difficult to discern. The effects of the tariff shock is yet to materialize. The models suggest that both sides of the Fed mandate will be under stress going forward, but it remains unclear which will dominate. The FF rate is projected to go sideways for the time being in the models.
In short, we believe the FOMC is unlikely to commit strongly in either direction until it becomes clear which issue (growth or inflation) dominates. Thus, the policy stance will likely remain cautious—”Wait and See.”
Main points:
- Recent data have been roughly as expected relative to the Fed staff’s forecast implied by the latest FOMC minutes. There has been no improvement in the distribution of price changes, which continues to be inconsistent with the inflation target.
Figure 1. Core CPI MoM prices change distributions.
- The medium-term forecast has been revised upward; pi* remains higher than target. Compared to the previous projection, the medium-term model-based forecast is higher, reflecting the upcoming effect of tariffs. The estimate for pi* remains around 2½%.
Figure 2. Current and previous FOMC round “main” model forecast of core PCE price inflation.
- The estimate of “underlying inflation” (pi*) remains higher than target. According to our models, pi* is at 2.6 percent. Pi* is very persistent by nature and remains above the Fed target.
Figure 3. Evolution of the estimate of pi*.
Path of the Federal Funds (FF) rates. The FF rate path implied by the March SEP is below all rules. Assuming that core PCE reaccelerates this year, and the unemployment rate ticks up, inertial, non-inertial Taylor rules, and the FRB-US model suggest that the Fed is “on hold” until it becomes clear which side of the mandate dominates.
Note: Figure 4 does not reflect the latest available FRB-US dataset, as we are waiting for the BEA release of Q1. We will circulate an update in the next 2 days. In any case, we do not expect the main message to change.
Figure 4. FRB-US model forecast
Note: red-dashed lines = model forecast, blue dots = March SEP.
As usual, we would be more than happy to schedule a meeting to discuss the details.