Today’s letter is a little different. Moving forward, each “Fed Day” (FOMC announcement + Chair press conference day) we’ll preview the meeting and predict the FOMC’s decision.

SETTING THE SCENE

This marks the first FOMC meeting since President Trump announced sweeping tariffs that significantly exceeded market expectations. Since then, the president has urged Chair Powell (and the rest of the FOMC) to cut interest rates, even calling for Powell’s removal as Chair. Earlier this month, the Department of Commerce reported a 0.3% contraction in first quarter GDP, well below expectations of ~0.4% growth. The report also indicated an uptick in core inflation, and with inflation expectations also rising, concerns have grown over a potential resurgence in inflationary pressures. Despite these headwinds, the S&P 500 has recovered almost all its losses since the tariffs were announced, driven by optimism surrounding potential trade deals.

KEY CONSIDERATIONS

The FOMC is in a bind. After several rate cuts in 2024, the Fed was expected to continue easing in 2025. However, the recent tariff shock has shifted the economic outlook – elevating the risk of both higher inflation and rising unemployment. Interest rates can be used to address either inflationary or labor market issues, not both simultaneously. When employment rises, inflation tends to increase; when employment falls, inflation usually decreases. Rate cuts help encourage hiring and investment by reducing the cost of capital, while rate hikes help contain inflation. With early economic data indicating pressure on both employment and prices, the FOMC now faces the difficult choice of prioritizing the labor market or controlling inflation.

PREDICTION: FOMC HOLDS RATES AND CONTINUES PACE OF QUANTITATIVE TIGHTENING

I expect the FOMC to hold rates and maintain the current pace of QT in its 5/7 announcement, and to signal it will take a cautious approach to rate cuts for the remainder of 2025. The Committee has been careful to avoid overreacting to policy developments and is likely to remain patient until there is greater clarity on tariff impacts and more definitive signals from the economic data. While a weak April jobs report might have prompted a rate cut, the combination of a recent jobs beat and rising inflation risks makes a rate cut later today unlikely.

The FOMC’s decision will be released at 2:00pm ET followed by the Chair’s press conference at 2:30pm.

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