Fed Views Economy as Healthy, Sees No Reason to Rush Rate Cuts

FS Insight Team

Yesterday was the first meeting of the Federal Open Market Committee since April 2, when President Donald Trump formally introduced sweeping tariffs on hundreds of countries. 

Markets plunged immediately after Liberation Day but have since recovered back to pre-Liberation Day levels, with investors whipsawing in response to fluctuating rhetoric from President Trump and senior administration officials regarding trade and the economy.

Ahead of Wednesday's FOMC rate decision, Fed funds futures trading implied a nearly unanimous expectation that the FOMC would keep rates unchanged this month. The Fed doesn’t like to surprise: it left rates unchanged at 4.25%-4.5%, continuing to wait even as some of its central-bank peers in other countries cut. That’s arguably a good thing. Being able to (correctly) predict what the committee was going to do and what would be signaled seems like a luxury in which markets have not often partaken recently.

A solid majority of investors anticipated that the Fed would cut rates three times or more by the end of 2025. 

As usual, yesterday's rate decision was announced in a media statement, and Fed Chair Jerome Powell fielded questions during a post-meeting press conference.

The Fed's view: the U.S. economy doesn’t need rate cuts right now

The FOMC in general, and Powell in particular, characterized the overall economy as healthy and resilient. The Fed used the word "solid" to describe both economic growth and labor market conditions, even while acknowledging heightened uncertainty and risks to both aspects of its dual mandate.

Similarly, Chair Powell acknowledged that "the underlying inflation picture is good," with the overall economy "resilient and [...] in good shape." He reiterated this message multiple times during the presser. 

On tariffs, they’re on wait-and-see mode

On the proposed tariffs and the potential for a broad trade war, Powell acknowledged that the scope and scale of what Trump announced on April 2 "was really substantially larger than than anticipated in [...] in our forecasts." He further admitted that personally, "my gut tells me that uncertainty about the path of the economy is extremely elevated, and that the downside risks have increased." 

The Fed Chair characterized his fellow FOMC members as considering the possibility that the effects of the tariffs could ultimately mean a "delay" in achieving the Fed's inflation and employment objectives. However, with the impact from the tariffs yet to show up meaningfully in the concrete data yet, the Committee evidently found it difficult to justify cutting (or raising, a possibility one reporter floated). The cautious approach could be seen during the press conference: Powell used the phrase “wait and see” 11 times on Wednesday. 

And yet …

Powell was asked about the Fed's opinion about the odds of a recession, and he deflected. "We don't publish a forecast that assesses how likely a recession is," he said. "But in any case, it's not a situation where we can be preemptive" with a rate cut. 

Ahead of yesterday's meeting Trump had made no secret about wanting the Fed to cut rates, and afterwards, he called Powell a "fool, who doesn't have a clue" (though he did add that "other than that, I like him very much!") 

For his part, Powell said that the president's commentary "doesn't affect our doing our job at all." He conceded that Fed policy was "somewhat restrictive," but given current economic resilience, "there's no real cost to our waiting at this point." Later, he added, "We think right now the appropriate thing to do is wait and see how things evolve."

This led to his being asked what might convince the Fed to cut. He refused to provide any specific numbers or criteria, suggesting only that the extent of any damage done by tariffs would be considered. Powell was then asked "how much of [a decision to be cut] will be rooted in a forecast versus data dependence," and perhaps indicating a possible willingness to take a more forward-looking view in the future, he replied, "It would be a combination of the two."

The S&P 500 closed the day up 0.43%, with some upward swings in the afternoon that might have been related to reports that Trump is set to ease chip-export restrictions. Nevertheless, investors do not seem to have interpreted Powell's remarks as particularly hawkish. 

The FOMC is scheduled to meet again on June 18.

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