Economic news provides Fed with 'little clarity' ahead of today's FOMC rate decision

Thus far at least, consumers appear resilient to tariff uncertainty, while the PMI surveys are pointing to solid levels of business activity. This has supported the notion that a decent rebound in US growth is in the offing in the second quarter of the year, following the modest downturn in Q1.

The Atlanta Fed GDPNow estimate is currently pointing to annualised expansion of nearly 4%, owing partly to expectations for a correction in imports. The May US inflation report came out of left field, however, and may have caught a few FOMC officials off guard. To our surprise, the data not only fell short of estimates, but showed no real signs that Trump’s tariffs are placing upward pressure on consumer prices. Our favoured metric, the three-month annualised core rate, is now below the Fed’s 2% target (1.7%) and at its lowest level in four years.

Of course, it remains very early days and we still think that a tariff-induced uptick in inflation is on the cards in the coming months. Yet, the data suggests that businesses may be absorbing rising costs to a greater extent than economists had anticipated, rather than passing this onto consumers.

Perhaps the biggest factor that will determine the market reaction will be whether FOMC officials place greater stock on either actual economic data, or the expected impact of the tariffs on future data. One could make an argument that the latest news on US inflation and the jobs market warrants easier monetary policy settings.

Yet, with price hikes likely on the way due to the tariffs, we think that officials will be reluctant to sound too dovish at this junction, either in the communications or the dot plot.

A hawkish dot plot, and remarks that stress a lack of urgency to lower rates, could allow room for some dollar strength in the second half of the week.