The economy overall has "continued to expand at a solid pace," the Federal Open Market Committee said in a policy statement, attributing a drop in first-quarter output to record imports as businesses and households rushed to front-run new import taxes. The labor market remained "solid" and inflation was still "somewhat elevated," it said.
The direction of policy will depend on which of those risks develop, or, in the more difficult outcome, whether inflation and unemployment increase together and force the Fed to choose which risk is more important to try to offset with monetary policy.
At a press conference after the announcement, Fed Chair Jerome Powell said there was no need to be in a hurry to change policy and the decision was clear to wait and watch data for any impact from tariffs.
MARKET REACTION:
STOCKS: The S&P 500 (.SPX) briefly dipped then turned 0.17% firmer
BONDS: The yield on benchmark U.S. 10-year notes fell to 4.2791%. The 2-year note yield eased then came back to 3.793%
FOREX: The dollar index dipped then turned 0.35% higher and the euro was down 0.51%
COMMENTS:
MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET SOLUTIONS TEAM, ALLSPRING GLOBAL INVESTMENTS, LONDON
"Given continued worries around tariffs and how they could affect U.S. growth and inflation, the Fed is following a widely expected, “wait & see” approach on rates. We believe the next likely window for the Fed to lower rates won’t be until September or possibly later. The Fed itself expects to make only two rate cuts this year versus the market’s expectation of three."
"The interest rate market currently expects the Fed will cut rates to around 3.6% by the end of 2025. A lot will depend on how the inflation versus growth tradeoff develops. Growth is likely to continue weakening, and the Fed would ideally want to cut rates to support growth - though over the shorter term, higher prices could make that tricky."
ADAM REINERT, CIO, MARSHALL FINANCIAL, DOYLESTOWN, PA
“Despite performative opinions from powerful D.C. figures in the weeks leading up to today’s FOMC meeting, expectations for further easing remained low. However, with mixed economic data and warnings of higher inflation and unemployment in today's statement, the stakes are high for the Fed’s messaging strategy this summer.
“While Powell and his colleagues may find some reassurance in recent labor market data, the threat of further tariff fallout remains a real risk that could compel them to act in coming meetings. On the macro front, we believe a key consideration will be whether hard data begins to confirm weakened consumer sentiment, or if, much like we saw in 2022, consumer resiliency continues to prevail. If the 2018 tariff negotiations offer any insight, a less hawkish, more accommodative Fed may be necessary to lift the market and economy out of any potential tariff related malaise.
GARRETT MELSON, PORTFOLIO STRATEGIST, NATIXIS INVESTMENT MANAGERS, BOSTON
“Taking a look at the statement and the decision, not a whole lot that I think should surprise anybody. It was kind of interesting that they led off with that comment about the trade deficit and net exports. But again, it's nothing that anybody didn't already know...And so again, I think it's the same story we've had, which is, underlying growth seems to be cooling and they're not doing anything, which means, you're continuing to see passive tightening in policy. The risk continues to grow that growth continues to cool through the summer and that makes it likely that maybe if not June but by July, they’re probably cutting. And that they might be doing it sequentially through the year end.”
JASON PRIDE, CHIEF INVESTMENT STRATEGIST, GLENMEDE, PHILADELPHIA (in email)
“If it was not already obvious from Fed statements over the last few weeks, the press release formally codified that stagflation pressures are the key challenge for the Fed. Aside from a recognition that big swings in net exports masked a solid economy in Q1, the addition of the sentence highlighting that “the risks of higher unemployment and higher inflation have risen” was the biggest change to the press release. The path for monetary policy from here is heavily path dependent, conditional on whether the “stag” or the “flation” emerges as the bigger risk. If the economy appears to hold up reasonably well, tariffs are more likely to feed through to inflation and the Fed may take a more careful approach to rate cuts this year. If aggregate demand starts to weaken under the weight of higher prices, tighter financial conditions and/or perhaps recession may prompt a more aggressive rate cut campaign for the Fed.”
BILL ZOX, PORTFOLIO MANAGER, BRANDYWINE GLOBAL, COLUMBUS, OHIO (in email)
“By the time the Fed moves, it will be patently obvious what they should be doing. The real action to watch is between the Trump administration and the financial markets. If the Fed were to cut prematurely, the 10-year yield could move higher, which would be counterproductive.”
ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, LYNNFIELD, MASSACHUSETTS
"Clearly, the statement is trying to send a message to the White House that their recent actions have made the economic environment more difficult. They're saying that the risk of higher employment has risen, the risk of higher inflation has risen. And they didn't specifically attribute it to the tariffs, but I think anybody looking at that is going to understand that's what they mean."
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER FOR NORTHLIGHT ASSET MANAGEMENT, CHARLOTTE, NORTH CAROLINA (in email)
"The Federal Reserve is in a bind – with concerns about inflation and an economic slump, which will lead to higher unemployment, pulling them in two opposite directions. Because of this, the Fed is going to have to wait for unemployment to spike before they resume cutting rates, and by that point it might be too late."
"The markets are going to increasingly worry about a recession and unless some trade deals are made before the tariff pause runs out, we are going to see markets drop again like they did in early April."
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“No surprises, the Fed leaving rates unchanged. I guess there's a sense of perhaps the Fed is talking, hinting at stagflation, and of course, uncertainties over the tariffs.”
“I would say this statement is a little bit more hawkish than I expected.”
“This Fed meeting was marked by a lot of uncertainties and a firm resolution to stay the course until the Fed has more information about the inflationary impact from tariffs.”
JAMIE COX MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND VIRGINIA
"The Treasury has supplanted the Fed for market moving news these days—and that’s a good thing. The Fed is actually where it communicated to markets it would be - attentive to the risks posed by tariffs and would be on hold until smoke clears."
JULIA HERMANN, GLOBAL MARKET STRATEGIST, NEW YORK LIFE INVESTMENTS, NEW YORK, NY
"Their ability to preemptively cut rates to shore up economic growth is constrained by upside inflation risks, and then, conversely, their ability to preemptively hike rates to reduce inflation risk is constrained by downside risk to growth. So, it's a stagflation conundrum for the Fed. Where it results, in terms of Fed policy, is that we expect the Fed to stay on hold or as long as possible."
"That means that we disagree with the cumulative market consensus that comes out of Fed Funds Futures, where consensus is that we will see meaningful rate cuts in the back half of the year. We do not expect that. We expect to see meaningful easing from the Fed only in the scenario that economic growth figures really disappoint."
"It is a pretty clear market expectation that everyone, including the Federal Reserve, has to be in a bit of wait and see mode until the 90-day tariff pause ends."
SEEMA SHAH, CHIEF GLOBAL STRATEGIST, PRINCIPAL ASSET MANAGEMENT (in email)
"The Fed has been plunged into an almost impossible situation whereby its two mandates will likely move in opposite directions, but government policy – which is incredibly uncertain itself - will dictate both the timing and magnitudes of those moves. Certainly, the recent Trump headline suggesting an already hardline approach to China tariff negotiations, further reinforces the uncomfortable position for the Fed. In this situation, what else can the Fed do but sit on its hands? Rate cuts will be required but, increasingly, it seems that the Fed will need to wait until late Q3 before the window of opportunity opens."
ASHISH SHAH, CIO PUBLIC INVESTING, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK
“For the time being the Fed remains in a holding pattern as it waits for uncertainty to clear. Recent better-than-feared jobs data has supported the Fed’s on-hold stance, and the onus is on the labor market to weaken sufficiently to bring a resumption of its easing cycle. Any weakening in the labor market, however, could take a number of months to become apparent and we see the odds skewed towards another ‘hold’ at next month’s meeting.”
MICHELE RANERI, VICE PRESIDENT AND HEAD OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO (in email)
"This (Fed's move) was likely a result of high inflation and other recent economic trends, such as the strong April jobs report. While the possibility still exists for potential rate cuts later this year, the economic picture is complicated, and it's too early to know if or when those cuts might happen.
"We're starting to see some positive signs in lending - mortgages, home equity loans, and auto financing are showing signs of life after a slow couple of years. However, these gains will likely remain incremental until rates begin ticking down, as many borrowers are reluctant to take on a loan at today’s rates, particularly if they currently have a loan at a significantly lower rate.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
"The Fed statement was a statement of the obvious. They gave roughly equal air time to the threats to growth and inflation, so that tells us we need to wait and see how the data shake out between now and the June meeting before deciding whether they're going to prioritize keeping inflation expectations contained or to address any hit to growth. The Fed isn't being complacent, twiddling their thumbs, they're like the rest of us: monitoring things vigilantly."
