Our Take on Today's Fed Meeting (3/18)

The policy statement noted that the “implications of developments in the Middle East for the US economy are uncertain,” and indeed, “uncertainty” was the predominant theme in the Powell news conference that followed. Mr. Powell even joked that if there were a meeting where policymakers could skip making forecasts, it would be this one. As a result, he advised taking the latest Fed projections (table below) “with a grain of salt,” noting that policymakers found it easier to keep their projections roughly unchanged.

Source: Federal Reserve

Still, there were some modest tweaks to the numbers. The median estimate for personal consumption expenditure (PCE) inflation, for example, rose to 2.7% (from 2.4%), while the median estimate for core PCE inflation increased to 2.7% from 2.5%. The median estimate for real gross domestic product (GDP) also moved higher, to 2.4% from 2.3%, while the median estimate for the unemployment rate remained unchanged at 4.4%. For now, the Fed is not looking for a slowdown, instead characterizing the economy’s performance year to date as “solid.”

There was no change in the Fed’s estimate calling for one rate cut this year, scuttling earlier talk that this cut would be removed altogether. However, longer-run estimates for the federal funds rate were ticked up to 3.10% from 3.00%, suggesting the cut is not expected to materially impact borrowing costs.

With regard to the current oil shock, Mr. Powell acknowledged that higher energy prices will push up overall inflation in the short term, but that it is too soon to know whether this will be sustained. The chair noted that previous shocks tended to be one-off events, as crude prices inevitably came down in the months that followed. Although Mr. Powell was careful not to offer any oil price forecast, he implied that the Fed is looking for a repeat of this pattern.

As in previous meetings, Mr. Powell acknowledged that the Fed remains in a tough position responding to stickier inflation, even as the labor market weakens. However, he did try to frame the labor situation more positively, nothing that the overall unemployment rate remains fairly low and is expected to stay that way. This is a direct result of lower labor demand and reduced labor supply due to tighter immigration. Consequently, the breakeven number needed for the economy to generate enough jobs to accommodate labor growth is about right, as there is low demand for workers and suboptimal hiring, but supply is also down sharply. As a result of uncertain inflation prospects and a labor market that is balanced, at least based on this metric, Mr. Powell and his colleagues were content to keep the Fed on hold for now.

One item that seems to be frustrating the Fed is that tariff increases have yet to work their way through the system. Mr. Powell believes that of the roughly 3% total “core inflation,” about half to three-quarters is tariff-related. Once tariffs fully work through the system, the chair expects inflation to improve.

Notably, Mr. Powell did not point out that tariffs are now capped at 15% for most imports and that roughly $170 billion of refunds could potentially flow back into the economy. Instead, he said the Fed is assuming that Mr. Trump will raise tariffs back to their original levels. No one challenged him on this point; however, it will be far more difficult under the new statuses to return tariffs to previous levels now that IEEPA has been rule unconstitutional.

With regard to a rate hike, Mr. Powell noted that the possibility of such a move did come up at the meeting (as it did at the last meeting), but the vast majority of participants do not see that as their base case.

Midway through the press conference, Mr. Powell noted that if his successor is not confirmed by the end of his term in May, he would serve as “chair pro tem” until a successor is confirmed. He added that this is consistent with what has been done on prior occasions, including his own.

That is an interesting take on the succession plan, as the Trump administration is assuming the president has the right to appoint a successor as soon as Mr. Powell’s term ends. (A Bloomberg reporter suggested the administration could pursue the matter in court if the confirmation battle is not resolved by May, though May is still some time away.) Mr. Powell also noted that he has no intention of leaving the board until the Fed investigation is over. On whether he will serve as a governor after his term ends, he said he has not made that decision, noting he would “make that decision based on what I think is best for the institution and for the people we serve.”

US equity markets did no respond positively, with all three major indices closing at their lows. However, this may have been influenced by ongoing fighting in the Middle East, with another Iranian missile attack on the UAE occurring just as the Powell news conference was getting underway. This prompted oil prices to spike in after-hours trading, with Brent up roughly $7 per barrel on the day.

There was little change in base metals, aside from a reversal in aluminum into positive territory by the close. The aluminum complex appears to be trading more in line with oil than with other metals at this stage. Precious metals also sustained heavy losses. We will see what Thursday brings, but we expect continued bearish pressure across most commodities, apart from aluminum and oil.