May flashlight for the FOMC blackout period – Waiting for the fog to lift

Summary

We expect the FOMC will leave its target range for the federal funds rate unchanged at 4.25-4.50% at its upcoming meeting on May 6-7, a view widely shared by financial markets and economists. Market pricing currently implies only a 9% probability of the FOMC cutting the fed funds rate by 25 bps.

Since the FOMC concluded its last policy meeting on March 19, the Trump administration has announced unprecedented changes to trade policy. While some of these plans have been temporarily paused, tariffs remain significantly higher than what was generally anticipated prior to the April 2 "Liberation Day" announcement. After severe turmoil in financial markets initially following the announcement, markets have calmed somewhat, but financial conditions remain tighter than when the FOMC gathered nearly six weeks ago.

"Soft" survey data on consumer and business sentiment have also weakened sharply over the past six weeks. Yet, "hard" economic data have remained in good shape. Steady initial jobless claims point to the labor market maintaining its footing, while the year-over-year rate of core PCE inflation is on track to ease to a four-year low of 2.6% when data for March print on April 30.

Public comments by Fed officials during the inter-meeting period have emphasized the uncertainty that hangs over the outlook as a result of the changing trade environment. Higher tariffs present a tricky challenge for the Committee, as they threaten to both weaken the labor market and raise prices. There seems to be broad consensus on the Committee that the current monetary policy setting is well positioned to respond to changes in the outlook that threaten either side of the dual mandate.

Our current forecast looks for the FOMC to reduce the federal funds rate by 125 bps this year, starting with the June meeting. Some dialing back in the U.S. posture on tariffs, the relatively benign run of recent "hard" data and the patient comments from key Fed officials in recent weeks lead us to believe the risks are skewed toward the first rate cut occurring later than the June meeting. That said, with monetary policy still somewhat restrictive and weaker economic growth expected to weigh on the labor market in the months ahead, we still think the FOMC will reduce the federal funds rate this year by more than the 50 bps implied by the median projection in the March meeting's summary of economic projections.

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