By Jeanette Garretty, Chief Economist
The Federal Open Market Committee (FOMC) announced today it would leave the target Feds Funds interest rate unchanged at 4.25%-4.5%. Although financial markets expressed some mild disappointment that rates were being held steady, the announcement was widely anticipated.
Much has been written about today’s FOMC Interest Rate Decision, marking the start of a new era for the Fed. Fed 2.0, if not, perhaps Fed 3.0. With the significant caveat that this has been a Federal Reserve all over the map in terms of policy, and Chairman Powell has been known to change personas radically from one meeting to the next, Wednesday’s press conference certainly seemed . . . different. Firstly, while much was initially made of a phrase removed from the announcement text that cited “meaningful progress” on inflation, Chairman Powell said that there simply had been a decision to clean up some of the wording and make the message simpler, without particular interest in retaining the language or syntax of the past few years. Secondly, in a variety of ways, Chairman Powell emphasized that “the economy and policy are in a very good place,” allowing the Fed to take the time to evaluate and assess the next moves on interest rates. This is, of course, the recently famous “Pause,” but in the press conference, it was made more to seem like the beginning of a new approach, not a holding pattern in the glide path of the past two years. Thirdly, there was an early reference by Chairman Powell to the every-five-year monetary policy review process commonly referred to as the “Tealbooks,” seemingly with the intent to signal that the era of the last Tealbook review, done in 2020, was over. (It was notable, however, that Powell strongly emphasized that the 2% inflation target would NOT be part of the review and would be retained as a critical part of any new policy.) Finally, a careful review of the video might reveal an error, but this seems to have been the first press conference in years where Chairman Powell didn’t say “data-driven” even once.
The most important carry-over into this new era, if it is a new era, is the Federal Reserve’s continuing view that monetary policy is restrictive. Chairman Powell made an effort to highlight that the Federal Reserve is accepting that policy is less restrictive than it was 12 months ago and feels that to be appropriate while simultaneously recognizing that policy is still applying a brake to economic growth that can be removed as needed. Additionally, and in light of the restrictive nature of the current policy, it would not be appropriate to hold off on any further interest rate cuts until the inflation target of 2% is obtained, per a question from the press conference audience. Monetary policy acts on the economy with a lag that is still not well-measured and coupled with the term-premium that has elevated longer-term bond yields recently; one must be careful not to be overly restrictive for an economy that has yet to fully reveal the effects of higher rates.
It was hard to ignore that the questions from reporters were quite different as well; substantially less about monetary policy and focused intensively on President Trump’s influence on Chairman Powell’s Federal Reserve. The tone was set early, and the Chairman never wavered in his intent “to avoid commenting even indirectly on the issue of how fiscal policy is conducted.” Or, in a slight variation on the theme, “[I am] not going to comment on anything a politician says.” This resolve took an especially interesting turn when a reporter asked about the role of gasoline and energy prices in contributing to inflation (a completely legitimate question on its own), and Chairman Powell refused to answer, well aware that President Trump had recently said that bringing down gasoline and energy prices would fix the inflation problem. This is not to say that Chairman Powell appeared cowed; quite the contrary. Several reporters asked about the Federal Reserve’s submission to the (now-rescinded, maybe) OMB budget freeze order, and the reaction to President Trump saying that the Fed was “grossly over-staffed,” and Chairman Powell’s response could best be described as curt, icy and to the point; a “no comment” with a purposeful smile. It would not have been surprising to see the Chairman hold up a velvet-gloved fist to reveal the brass knuckles underneath.
The Federal Reserve has long devoted considerable scrutiny to the US labor market in assessing inflationary threats; the “imbalance” of an excess demand for labor in 2022 and 2023 was a major cause for alarm as inflation skyrocketed. A very strong affirmation by Chairman Powell that the current “labor market is broadly in balance” and “NOT a source of inflation” was welcomed, but also invited questions about immigration and immigration policy. He chose to focus on the sharp decline of “in-flows” across the southern border, beginning last summer, matching up with a decline in job openings. The issue of labor force reduction resulting from deportations was ignored, and this position was unchallenged at the press conference. The other hot-topic item that was addressed probably more thoughtfully than expected had to do with tariffs. One reporter’s question about how the imposition of tariffs might play out in 2025 in contrast to the previous sudden imposition of tariffs in 2018 elicited a very nuanced answer. Chairman Powell mentioned that in the earlier use of tariffs (Trump’s first term), the economy was not coming off a period of high inflation; the economy was strong but not this strong, and consumer unhappiness with both the price level and the rate of increase in prices was not the issue it is today.
Furthermore, he mused that there was still a great deal of uncertainty as to how tariffs today might play out, i.e., who might actually bear the burden of the imposed tariffs. In a marketplace where consumers have become emboldened to express their dissatisfaction with the high cost of various items, it might be the case that the manufacturer or retailer would have to absorb the hit from the tariff rather than pass the impact fully along to the consumer. “We just don’t know” was the constant refrain, and it was accepted as an accurate description of reality.
Said one reporter in the preface to his question, “Uncertainty is certainly a theme today,” and Chairman Powell took full advantage of the comic relief. It is rumored that he laughed. He definitely smiled. One had the impression that it was a moment of bonding between the Chairman and his immediate audience, a moment in which his interrogators became his interlocutors, and everyone recognized they were all in this together and doing the best that they could.
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