MNI FED WATCH: Rates On Hold; Growth, Inflation Outlook Muddy
MNI (LONDON) - The Federal Reserve is expected to keep interest rates on hold for a second straight meeting Wednesday and leave forecasts largely unchanged as it awaits further clarity on how Trump administration policy changes are affecting inflation and employment.
Worries over a potential recession have intensified in recent weeks but labor market data remain solid and inflation still hotter than desired. Rising tariffs, federal government layoffs and funding cuts have rattled sentiment but whether that will translate to a significant impact on consumption is yet unknown.
"We do not need to be in a hurry, and are well positioned to wait for greater clarity," Fed Chair Jerome Powell said ahead of the blackout period. "If the economy remains strong but inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly."
The Summary of Economic Projections will likely show a median expectation of 50 basis points of easing this year, unchanged from December, and one fewer quarter-point cut than the three priced in by investors. (See: MNI INTERVIEW: Fed To Cut Just Once Due To Tariffs-Carpenter)
PRICE PRESSURES STRONG
Core CPI inflation accelerated to 3.6% on both a three- and six-month annualized basis in February, compared to the 12-month measure of 3.1%. The Fed's preferred gauge – core PCE inflation – is expected to exceed core CPI on a monthly basis, coming in at 0.3%-0.4% and lifting the 12-month measure by a tenth or two to 2.7%-2.8%.
Trump has imposed large tariff increases on China and threatened aggressive duties on other major trading partners, and Commerce Secretary Howard Lutnick has warned of a one-time increase in prices. But whether the Fed can look through the effect on inflation will be difficult to predict given uncertainty surrounding how long the trade war will last and the severity of countermeasures by targeted countries. (See: MNI INTERVIEW: Fed Nearly Done Easing Barring Slump-Benigno)
Also of concern is a rise in some near-term measures of inflation expectations. The University of Michigan’s February survey showed median consumer inflation expectations over the next year had risen to 4.3% and over the next five to 10 years to 3.5%, a 30-year high. (See: MNI INTERVIEW: Fed To Closely Gauge Inflation Views - Schoenle)
Higher inflation and inflation expectations if sustained could cause the Fed to reevaluate its planned cuts. (See: MNI INTERVIEW: Rising Price Expectations Could Prompt Fed Hike)
GROWTH CONCERNS
The U.S. unemployment rate ticked up a tenth to 4.1% in February but labor market data have otherwise been calm.
Consumer spending in the first two months of the year were more muted, and analysts expect trade policy uncertainty to exert a drag on consumption and business investment through the end of the year.
Fed officials more focused on the growth-dampening effects of tariffs could pencil in three cuts this month. (See: MNI INTERVIEW: Fed To Focus On Growth Drag From Tariffs - Sahm)
QT
The Federal Reserve plans to keep reducing its balance sheet until market signals show reserves are transitioning from abundant to ample levels, though it may slow or pause this process while Congress negotiates a deal to raise the debt limit. (See: MNI POLICY: Fed Seeks Market Signals To End QT, Pause Possible)
Most analysts expect any announcement of a reduction in QT to come later in the spring. (See: MNI INTERVIEW: Fed QT Has Room To Run Well Into 2026-Crandall)