The FOMC is set to meet formally for the first time since President Trump’s Liberation Day. Policymakers are fully expected to keep rates steady at 4.25% – 4.50%, with any chance of a rate cut squashed by Friday’s solid labour market report. The dual mandate is front and centre for the Fed – that’s their two key goals of price stability and maximum employment. So, while officials will be mindful of the potential negative effects on activity and labour demand of tariffs, expectations are for inflation to again be emphasised as the focus at today’s meeting.
The Trump administration has since provided the world with a reprieve from the extreme tariffs first mooted, but rampant inflation expectations amongst households and businesses back the FOMC guidance that inflation remains their top priority. No formal update to forecasts will be provided, but guidance is likely to imply that rate cuts are off the agenda until at least the second half of this year. Of course, this might further anger Trump, who has been pressing vociferously for rate cuts.
Hard and soft data differ; Fed speakers mixed
While the trade war is already weighing on the economy, the impact on hard data has so far been more modest than feared. Fed Chair Powell recently warned that unemployment looks set to rise, with the effect from tariffs likely to be larger than previously thought. But the labour market is in decent shape, and recovering stock markets, lower bond yields, weaker USD and lower oil prices have all eased financial conditions markedly. The relatively buoyant hard data also contrasts with the deteriorating picture in softer, survey figures which show a much more downbeat outlook.
Interestingly, we recently heard from Fed Governor Waller who is often seen as the consensus voice on the FOMC. He took a clear step towards the dovish camp by firmly labelling tariff-driven inflation as ‘transitory’ and by warning against recessionary signs emerging in the second half of 2025. But there is still no real evidence of a cratering job markets which he looks for. Other Fed officials have sounded more cautious and called for patience, with the data needing to play out amid some fears of stagflation.
Ultimately, the Fed has little incentive to give any forward guidance amid all the tariff uncertainty. It probably won’t be until July when there is more clarity, on both China tariffs and reciprocal ones, while hard economic data may take longer to show the full impact.
Market reaction
Money markets are now pricing in around 81bps of policy easing for this year. This has come down from the near 125bps of cuts during ‘peak trade war chaos’ at the start of last month. Traders price in around a 30% chance of 25bps rate cut at the next meeting in mid-June, which was up near 60%+ before NFP. That leaves risks modestly skewed to a dovish reaction.
The dollar normally moves in line with short-dated US yields, but rebounding stocks and a more positive Trump may help to take some of the financial risk premium out of the greenback. The major pivot level on the Dollar Index remains 99.57, with the recent three-year low at 97.92.