MNI FED WATCH: Powell To Sit Tight Amid Heightened Uncertainty
MNI (WASHINGTON) - The Federal Reserve can afford to sit tight on monetary policy for now as increased uncertainty from President Donald Trump's tariffs policies could lead to one-time price hikes but also dampen economic activity in a way that reverses those effects, Fed Chair Jerome Powell said Wednesday.
"It's really appropriate to wait for further clarity. The costs of doing that, given that the economy is still solid, are very low," he told reporters after the FOMC decided to hold its benchmark overnight rate steady for a second straight meeting. "We think our policy is in a good place where we can move in the direction we need to."
Fresh forecasts from the 19-member rate-setting committee showed core inflation ending the year at 2.8%, three-tenths higher than officials expected in December, and growth for 2025 four-tenths weaker at 1.7%. The median forecast for interest rate cuts remained at two for this year and next, same as in December.
"The fact that there wasn't much change (in the dot plot) I think is partly because you see weaker growth but higher inflation – they kind of offset – and also frankly a little inertia when it comes to changing something in this highly uncertain time," he said.
Traders firmed up bets on a resumption of rate cuts in July after the presser and moved to price in 65 bps of cuts for 2025, up from 56 bps before the Fed meeting.
'TRANSITORY'
Asked if the Fed views tariffs as one-time price moves, Powell said: "It can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us – if it’s transitory. And that can be in the case of tariff inflation."
He noted inflation was transitory in Trump's first-term trade war in 2018 and 2019 but also conceded the Fed is "well aware" that pandemic-era inflation was initially misjudged as also being transitory.
Though short-run inflation expectations have increased, longer term expectations are "mostly well anchored," he said. (See: MNI INTERVIEW: Fed To Closely Gauge Inflation Views - Schoenle)
"The SEP doesn't really show further downward progress on inflation this year, and that's due to the tariffs coming in," he said. But "if there's an inflationary impulse that's going to go away on its own, it's not the right policy to tighten policy, because by the time you have your effect – by design you are lowering economic activity and unemployment. And if that's not necessary, you don't want to do it."
Labor market data are still solid and recession risks remain moderate, Powell said. Increasingly pessimistic consumer sentiment surveys may not translate to an actual pullback in spending, "but we don't know whether that will be the case here," he said.
QT
The FOMC decision that drew a dissent Wednesday was a largely unexpected move to slow the pace at which it allows Treasuries to run off the Fed's balance sheet to USD5 billion per month from USD25 billion. Governor Chris Waller preferred to continue the current pace of decline in security holdings.
The move was a technical one with no implications for monetary policy or the ultimate size of the balance sheet, Powell said. "It's just a common sense adjustment as you get closer and closer," he said. "That way we will be more and more confident that we are getting where we need to get." (See: MNI POLICY: Fed Seeks Market Signals To End QT, Pause Possible)