Fed Talk 5.7.25

Notable comments from Chairman Powell during today’s FOMC press conference and announcement.

From the FOMC Statement :

• “Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.”:  This opening acknowledgment hints that they believe this data point to be transitory, driven by companies stockpiling inventory ahead of tariffs. While the Fed continuously monitors vast amounts of economic data with its army of 400+ economists, they clearly noted the record monthly import data from the Commerce Department for March. However, they have not yet seen this translate into the real economy in a way that impacts their dual mandate goals.

From the FOMC press conference:

• “If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”:  Powell’s prepared remarks to open the press conference covered multiple scenarios for the macroeconomy. However, his base case is that if tariffs remain at current levels, they are likely to draw the economy into a recession—one that puts both sides of the Fed’s mandate in conflict, with higher unemployment and rising inflation.

• “Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.”:  Powell remarked at the last press conference that the Fed would not overlook any increases in inflation expectations. To keep longer-term inflation expectations anchored and maintain the hard-earned credibility established by the Volcker Fed in the early 1980s, Powell has kept policy restrictive for longer than originally anticipated. The longer the Fed remains on hold, the greater the chances that faults in the economy will emerge.  As the saying goes, “Regulation can’t get in all the cracks, but interest rates will.”

• “Policy is sort of moderately or modestly restrictive. It’s 100 basis points [BPs] less restrictive than it was last fall…we are in a good position where we are to let things evolve.”:  Powell has reiterated this statement during the past two FOMC press conferences.  The phrase “moderately restrictive” suggests a greater concern for inflation over employment, indicating that the committee currently views inflation as the more pressing mandate.

• “Our policy is in a good position; the costs of waiting to see further [data] are fairly low…It’s not a situation where we can be preemptive because we actually don’t know what the right response to the data will be until we see more data.”:
  Uncertainty surrounding the size, scale, and duration of tariffs—and their future impact on the economy—remains highly unpredictable.  However, the Fed has more flexibility due to a higher neutral interest rate (R*), allowing the use of traditional monetary policy tools to influence the broader economy when necessary.

• “We don’t have the kind of tools that are good at dealing with supply chain problems…what we can do with our interest rate tool is we can be more or less supportive of demand which would be a very inefficient way to try to fix supply chain problems.”:  In response to a reporter’s question about the current business impacts of tariffs, Powell emphasized a point he hasn’t had to make since the rate increases in 2022: monetary policy is a blunt tool, not designed for surgical strikes.  In the words of Benjamin Strong (NY Fed Governor 1914 to 1928), “Using monetary policy to impact one sector of the economy is like spanking all your kids for one of them misbehaving.”