No surprises in the official announcement: The Fed leaves interest rates unchanged and stands ready to respond if economic conditions demand, which they do not yet. With employment growth still strong and inflation trends calm enough to claim a continued movement towards the all-important 2% target, there was no reason for the Federal Open Market Committee (FOMC)to do anything. Investors seemed to be initially encouraged that the FOMC is apparently copacetic about inflation, although the official announcement specifically mentioned that the risk of accelerating inflation has risen. Forecasting is unquestionably the tough part, and that will be left for the next Fed meeting in June and the all-important update to the Statement of Economic Projections (SEP).
Chairman Powell opened his press conference with a litany of largely positive economic news, the exception being the mention of declining consumer confidence. In an interesting bit of commentary, Chairman Powell reminded everyone upfront that despite the focus on tariffs, there is actually significant change (and uncertainty) occurring in four economic areas: “trade, immigration, fiscal policy (spending), and regulation.”
The first question from reporters was about the dual mandate of maximum employment and stable prices, specifically regarding whether one of these mandates needs greater “attention” than the other. This question provided an opportunity for Chair Powell to emphasize one issue over the other, which he did not. Essentially, this was another way of saying that the data thus far does not require any immediate action on either front.
Chairman Powell stated that underlying inflation “is good.” Hanging in the air was a powerful “but” that followed this statement, as he referenced the lack of insight into how the current changes in the above-mentioned four areas of economic policy action will really fall out. “So much uncertainty”.
Higher odds of a recession? This question pushed Powell to his favorite comments about the difficulties of forecasting. It is understandable why Powell might wish to avoid economic forecasting at this moment. However, this has been a Fed chairman who has never wanted to embrace economic forecasting. In an overlooked aside, Chairman Powell mentioned that “if anything, we were a little late” when interest rates were cut last year, but he seemed to say that he was comfortable being a bit late, and he maintained a strong aversion to pre-emptive action.
A notable moment for markets occurred halfway through the press conference. When asked if interest rate cuts might be completely off the table this year —given the economic numbers and the slight increase in inflation in the first quarter —Chairman Powell did NOT take the opportunity to shoot down that line of reasoning.
Knowing that Chairman Powell does not do forecasts, reporters seemed to be interested in probing his “feeling” or “intuition” about the current environment. “Uncertainty is extremely elevated, and the downside risks have risen” was offered up by Chairman Powell (with a completely straight face) as the most accurate statement of what his “gut” is telling him. This caused a bit of laughter. More serious, however, was the repost from Howard Schneider (the reporter from Reuters), pointing out the downbeat messages in the most recent Beige Book. Chairman Powell chose to address the Beige Book by somewhat dismissing the importance of the Beige Book survey because “it has not shown up in the data” yet. This is more than a bit dangerous; if he is late, again, this dismissal of grass-roots input is going to be remembered.
An extended question about Fed mission-creep, specifically in the area of climate change, became mostly an unwanted diversion from the real topics of importance. Devoting five minutes of an important 45-minute press conference to respond to comments made by a former Fed governor is unconscionable.
Appropriate questioning regarding what would have to happen to prompt a rate cut brought the press conference back to what people already know: hard data. Again, there is an emphasis on how much the “hard” data has not changed. Re-emphasizing the point made above: It is of considerable concern that Chairman Powell readily acknowledged that he does not look to the “soft data,” such as current information on cargo shipments at West Coast ports or commentary from small business and consumers in various surveys, as an immediate and important input to monetary policy. Chairman Powell did state that while consumer sentiment has never had a strong predictive relationship with consumer spending, the unprecedented magnitude of the decline in consumer sentiment over the last two months signals the very unusual nature of this economic environment and represents a reason to pay more attention to sentiment surveys, not less.
In addressing the obvious difficulty of how to handle a situation where both unemployment and inflation might be rising at the same time, Chairman Powell elaborated upon established Fed policy to look at both goals (full employment and stable prices) and determine which goal is made further distant by the data — and how long it would then take to achieve each goal. The translation for this is that both prices and employment can take some time to adjust to monetary policy actions, depending upon the actual cause of the deviation from the goal. One interpretation of Powell’s statement might be that employment is likely to respond faster to monetary policy than prices being driven upwards by tariffs. In fact, Chairman Powell explicitly stated that the Fed has absolutely no ability to remedy supply-side issues except through very draconian means. This advances a consistent theme throughout the press conference: Chairman Powell does not see the need to be pre-emptive and does not want to accept the role of adjusting policy pre-emptively.
Much has been made over the years (including by this author) of a certain amount of “tone-deafness” by Chairman Powell when it comes to communicating with investors and markets. However, this press conference showcased his stellar abilities in communicating with the White House. Questions about trade policy, budget negotiations in Congress, trade talks with China this week, etc., were consistently parried with clear, concise statements about the Fed’s role being monetary policy, not fiscal policy. “We should not be commenting even verbally on trade talks with China,” and he did not. The memorable line, probably not intended to draw the laugh that it did, was that fiscal policymakers do not need the Fed’s advice on fiscal policy …” and the [Fed] does not need theirs on monetary policy.”
As usual, the last question was one of the more ridiculous. In paraphrase, asking Chairman Powell how much he would intend to cut rates when he does start cutting rates. This question was somewhat related to earlier questions regarding the previous Summary of Economic Projections (to be updated in 6 weeks) that showed a majority of the Fed board penciling in two rate cuts. Nevertheless, in light of the heavy emphasis on uncertainty and the disinterest in being pre-emptive. Why ask that question? This is a Fed in no hurry to do anything, with the likelihood that there may not be any motivating “hard data” until the second half of the year— which, at the moment, seems light years away.