In our last meeting on Monday, we emphasized that given the current economic uncertainty in the United States, it was urgent for the Fed to do nothing. Nothing different came out of the latest FOMC meeting! Key rates were, in fact, left unchanged in the 4.25%-4.50% range, as widely anticipated. Members of the American institution emphasized the extent of the uncertainties surrounding their economic forecasts, with Jerome Powell even judging that the Fed "was well positioned to wait for more clarity." Although the Fed still appears to be navigating blindly, the Fed's speech nevertheless sought to be reassuring, striving to gain some perspective by attempting to provide a longer-term anchor in the prevailing fog, both regarding the outlook for growth and inflation. On the growth front, the FOMC's forecasts have been substantially revised downward (1.7% versus 2.1% previously for this year and 1.8% versus 2% in 2026), impacted by the loss of confidence among economic agents linked to the potential consequences of Donald Trump's trade war. Nevertheless, a slowdown is not necessarily synonymous with a recession, and the Fed still considers the economy to be solid, particularly because the job market remains resilient, with an unemployment rate expected to remain relatively low. Despite the ongoing slowdown, Jerome Powell notes a balanced job market for several months, with a "low trend toward layoffs and hiring."
Regarding inflation, FOMC members do not seem particularly concerned about the potential consequences of tariffs, which would be transitory at best. As Jerome Powell strives to avoid making another monetary policy error, the notion of "transitory" likely doesn't evoke only good memories for him. In any case, the PCE inflation forecasts for 2025 and 2026 have been revised upwards, while the 2% target has been maintained for 2027.
Declining growth, rising inflation... the Fed is caught between two fires, and while it doesn't know which way to turn, it prefers not to overreact, and it has the means to do so. Jerome Powell is absolutely determined to avoid returning to a restrictive monetary policy, the effects of which take time to diffuse through the economy, while the prevailing uncertainty and the impacts of tariffs could only be temporary. The fact that FOMC members still anticipate two rate cuts by the end of the year, even though inflation could rebound, was perceived as a dovish bias by the financial markets, which welcomed the news. So, wait and see...
