When faced with a hodgepodge of contradictory data, the risk of drastic trade policy reversals at any moment, and a president threatening to erode the very independence of the Fed itself, the US might feel like it’s knee-deep in an economic emergency. But the central bank thinks the best course of action is to do, well, nothing.
The Federal Open Market Committee unsurprisingly held interest rates steady between 4.25% and 4.5% today, which is where they have been since December.
But Fed officials are all too aware that just because rates are stable doesn’t mean the economic situation is. In fact, if you took a shot every time Fed Chair Jerome Powell uttered the word "uncertainty" during today’s press conference, you’d be passed out on the couch by now.
“My gut tells me that uncertainty for the path of the economy is extremely elevated,” Powell explained.
Pain versus more pain
Powell’s predicament just keeps getting more complicated: One one hand, consumer sentiment has dipped while everyone and their mom is worried about a recession. The threat of the “stag” in stagflation would suggest the Fed should cut rates to give the economy a shot in the arm.
But on the other hand, the doom-and-gloom rhetoric hasn’t made its way into the economic data yet. Sure, GDP fell 0.3% during Q1, but that was largely due to a rush of imports before tariffs were implemented.
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Meanwhile, recent labor market data came in relatively hot, with the US adding 177,000 jobs last month while the unemployment rate remained unchanged. But these numbers don’t reflect President Trump’s tariffs, which are widely expected to rekindle inflation while slowing the economy.
All of this is why the Fed ultimately decided to keep rates steady today, Powell explained.
There’s another problem, too: If Powell were to lower rates, it could look like the Fed was bowing to Trump’s demands, and thus forfeiting its independence. That in itself would spook investors, since the central bank’s autonomy has long been the key to its ability to make tough, but necessary, decisions to stabilize the economy.
That’s why, ironically, Trump’s threats to oust Powell and his proclamations that the Fed should lower rates could actually backfire and make the agency even less likely to actually do what he wants.
Looking ahead: Powell is always lecturing us about the Fed’s “wait and see” approach, but it feels like he means it for real now. With so much still in the air in terms of tariff policy, it's really anyone’s guess how rates will look by the end of the year. Traders are now forecasting a 75% chance the Fed keeps rates steady yet again in June.—LB