FOMC Interest Rate Announcement, Summary of Economic Projections (SEP) and Fed Chairman Powell Press Conference
There were a few surprises in the Federal Open Market Committee Interest Rate decision this morning. The top line number – the Fed Funds target rate—was left unchanged at 4.25%-4.5%, as expected. However, the less visible but certainly significant decision to reduce the pace of the bond run-off from the Fed balance sheet, so-called Quantitative Tightening, was somewhat unanticipated. While the first take was that the FOMC had decided to take a preliminary step towards further easing by reducing the amount of tightening, Chairman Powell repeatedly went to great lengths in the press conference to indicate that this action had nothing to do with monetary policy. Specifically, it was “simply” a “common sense decision” to slow the pace of run-off at this time, in part triggered by the looming debt-ceiling threat but ultimately judged to be the right thing to do under any circumstance. Nevertheless, it was a surprise, common sense or not.
In the Summary of Economic Projections, there were signs of FOMC member concerns over future inflation. Despite the general reduction in expectations for economic growth in 2025, from 2.1% to 1.7% (a substantial and notable move), four FOMC members indicated that they would NOT lower interest rates this year, up from only one member in the last SEP released in December 2024. Additionally, it appears that many FOMC members widened the uncertainty around their projections for growth, unemployment, and inflation. When Chairman Powell was asked why there was no change in the outlook for rate cuts later this year, despite growth and tariff concerns, he charmingly stated the obvious: why would you do anything different, given the uncertainty– “What would YOU write down?” In other words, in his view, there currently is no clearer case for holding rates at current levels than there is for cutting rates later in the year.
The press conference was, in many ways, a sly tutorial in corporate macroeconomic forecasting. Economists charged with formulating projections that support business operations never place great emphasis on “point estimates” (the specific data item estimated to the second decimal point.) They wisely focus on the risks to the forecast, a “base case” scenario, some thoughtful alternatives, and the correct positioning of the forecast to allow for adjustments as more data is received. Companies and their business plans do not turn on a dime, so the concept of “positioning” is well-understood. Chairman Powell’s elaboration on both the interest rate decision and the Summary of Economic Projections repeatedly emphasized his view that the monetary authority of the Federal Reserve is in “a good place” for adjusting its actions and projections as more data is received. In a nice exposition of both the process and the dilemma, he further stated, “We are highly confident that we are well-positioned to move as needed [But] I don’t know anyone who has a lot of confidence in their forecast.”
Several concepts/observations came up multiple times and are summarized below:
- The US economy is currently “strong overall and labor market conditions remain solid.” Economic growth is probably slower than in the fourth quarter of 2024, but while hiring has slowed, quits have slowed as well, serving to keep the labor market in balance. Federal labor force cuts have yet to be measurably witnessed, other than in Washington DC, and the Fed is watching carefully for the impact on “federal spending adjacent” private sector industries.
- Consumer Confidence Surveys do not well-indicate the actual direction of consumer spending, nor do they provide a singular read on inflation expectations. As of now, the Federal Reserve believes that medium to long-term inflation expectations are well-anchored and short-term inflation expectations have not conclusively moved upwards.
- Chairman Powell favors an Alan Greenspan definition of price stability that cites the absence of a need to factor in future price movements when making day-to-day decisions. In that respect, as well as with the “surprising” increase in goods inflation in January and February, “progress is delayed.”
- Tariffs, or the threat thereof, are thought to have influenced the goods inflation early this year, but to what degree is highly uncertain. Furthermore, Chairman Powell said that it is going to be very difficult to “unpack” the influence of tariffs on the monthly inflation numbers, despite everyone’s desire to do so. To a remarkable degree, the Chairman embraced a discussion of tariffs in the context of inflation, and though there was very little that he said was alarmist, simply placing tariffs in that context may not be to the liking of the White House.
- The Federal Reserve’s normal five-year policy review process is underway and currently focused on labor markets and long-term growth potential. It should wind up by late summer.
Finally, a question about whether the recent firings at the FTC had any implications for the Federal Reserve and its governors was met with a briefly icy stare, a patient but pointed “I think I answered that before, in this very room” and considerable laughter as the reporter requested that he get a mulligan on his question. While this might fall into the category of comic relief, the comedy probably should best be understood as “dark” and the issue almost certainly lingers on everyone’s mind.