Caught in the Eddies
The Federal Reserve Open Market Committee (FOMC) held its target for interest rates unchanged at a range of 4.25% – 4.50%, its third consecutive meeting of no action. On the margin, however, monetary policy officials seem to see increased risks to economic growth that could affect the labor market in the coming months. In contrast to most overseas institutions, the Fed has always been a “growth first” central bank, but Gov. Chris Waller’s recent interview in which he hinted at aggressive cuts if the labor market weakens truly highlighted this view. For the moment, however, policymakers remain stuck in the eddies, unable to paddle upstream against inflation or downstream in support of growth risks.
Data since the FOMC met in mid-March has been, for lack of better word, confusing. The first read on 1Q GDP growth indicated overall economic contraction of -0.3%, but “core” economic strength of +3.0%, in line with that of 2023 – 2024 (real final sales to private domestic purchasers). Core PCE inflation has been volatile month-to-month, but as of the most recent report, it ran at a toasty +3.5% annualized rate during the first quarter. Jobs data have been decent on the surface, with monthly gains through April, but weaker underneath, with extended durations of unemployment and faster growth in lower-income categories. The trade deficit ramped up massively, corporate inventories have been all over the map, and residential investment looks to be doing loop-de-loops. Economist colleagues have labeled this period “Schrodinger’s economy,” or called it a “Wile E Coyote moment.” The problem today is that the April 2 tariff announcements have completely altered economic incentives, creating a hard break between a pre-April economy (for which we have data!) and a post-April economy (for which we do not!). Firms facing higher tariffs are probably just now putting business and hiring/firing plans into motion four weeks after the initial announcements. Against that backdrop, it is almost impossible for the Federal Reserve to act. Central banks are not quick response institutions, full stop. At best guess, it will take until the July meeting until the Fed can even tell which direction post-April economic variables are trending. No matter what markets want, the real economy simply does respond fast enough to policy developments for us to have a confident outlook.
