Almost no one expects the Federal Reserve to change the level of interest rates at its policy meeting on May 7-8. Rather, the focus will be on Fed Chair Jerome Powell’s comments in a post-meeting press conference about the reasons for officials’ cautious stance, and their economic outlook as the Trump administration’s tariffs begin to bite.
“Chairman Powell is all but certain to express a wait-and-see attitude,” said Erik Weisman, chief economist at MFS Investment Management. “The chaos of U.S. tariff policy leaves the future macroeconomic landscape especially challenging to discern.”
The Fed lowered the federal funds rate to a target range of 4.25%-4.50% at its December meeting, and has held rates steady since then. Futures-market pricing puts the odds of a quarter-percentage-point rate cut in May at only 3%, although the odds for a similar cut at the Fed’s mid-June meeting currently stand at about 31%, based on the CME FedWatch tool.
The central bank is wrestling with layers of uncertainty, Bill English, a professor at the Yale School of Management and former senior Fed economist, told Barron’s. Policymakers don’t know what the tariff policies will ultimately look like, how they’ll impact the economy, or how consumers and markets will respond. The challenge, said English, is deciding whether the Fed can confidently “look through” a likely jump in prices.
While Fed officials so far believe that tariffs will result in a temporary, or transitory increase in prices, there are concerns that inflation expectations could become unanchored, depending on the magnitude of price gains and their persistence. Economists also worry about the return of stagflation, or a period of higher prices coupled with sluggish growth.
“Consensus expectations for growth have been revised down, and expectations for inflation have been revised up,” Torston Slok, chief economist at Apollo, wrote in a recent note. “This is the definition of stagflation.”
While markets are still pricing in a potential rate cut as early as June, economists doubt that Powell will provide clear signals this week about future policy moves. “I’d be surprised if he signaled anything strongly either way,” said English.
Instead, the chair is likely to reemphasize the Fed’s commitment to data dependence.
New data out last week showed a 0.3% contraction in real gross domestic product in the first quarter and weakness in consumer spending, although the inflation rate that the Fed watches most closely was unchanged month to month.
Powell may also address the recent volatility in financial markets. After a brief period of extreme swings in yields, the Treasury market has settled down and is functioning well. Powell could cite that as evidence that liquidity remains robust.
The Fed’s cautious stance isn’t without risk, however. “A reactive Fed planning on limited policy accommodation raises the odds that a bad outcome on trade becomes worse, adding to recession risks,” said Vincent Reinhart, chief economist at BNY Investments.
As Powell faces reporters on Wednesday, expect questions about which risk–higher inflation or higher unemployment–feels more pressing. “I’d be interested to know how Powell is feeling about the balance of risks at this point,” said English.
He’s hardly the only one who wants to know that.