Points | FOMC - The Long Wait (May 2025)
- Edward von der Schmidt
- May 8
- 16 min read
The Federal Reserve's holding pattern appears set to continue indefinitely - or at least through the Summer. Perceptions of heightened outlook risks and deteriorating sentiment may or may not portend stagflation, but present circumstances are not yet so grave and pivotal facts may change. The economy's resilience has afforded the Fed time to await clearer indications out of Washington - particularly on tariffs - in order to assess implications for employment and inflation. Such clarity may not be forthcoming for months but will eventually allow the FOMC to more confidently chart a suitable path for monetary policy - even one that may require a difficult balancing act. For now, full employment, above-target inflation, and an amorphous forecast have called for the status quo as the world awaits further clarity.
7 MAY 2025
EDWARD VON DER SCHMIDT
| Sources
Key Takeaways
The Fed's broader assessment of the economy, labor markets, and inflation has not materially changed, but the outlook is even more uncertain than in March in the wake of out-sized and unanticipated tariff announcements. Risks to employment (lower) and inflation (higher) have intensified. While the Fed stands ready to adjust as needed, the central bank needs more time to assess what exactly it will be adjusting to.
Compound uncertainty cannot be understated. Even when policy uncertainty is resolved - for example, when we learn the fate of reciprocal tariffs - the attendant economic effects will themselves be uncertain. Only policy specificity can lift the first fog, and for that we will have to wait. Despite its vigilance, the Fed has freely admitted that it does not know for certain where things go from here - nor does anyone. Different policy regimes will prompt different outcomes that may call for very different prescriptions. At present, nothing is visibly broken and the Fed sees nothing to fix.
As trade and other policy unknowns are resolved, the Fed will be attuned to the "timing, scope, scale, and persistence" of the effects, which remain very uncertain. A low-tariff regime without lasting trade disruptions may dispel inflation fears and call for measured easing sooner amid a shallower slowdown. A high-tariff scenario and protracted trade war with cascading supply shocks could induce surging inflation at the same time that economic activity and labor markets get leveled. Many other factors can complicate matters further. There is a wide range of potential outcomes that will each call for a nuanced response.
Chair Powell continued to reiterate that overall conditions are solid and do not merit easing intervention at this time, especially given years of above-target inflation and prevalent price concerns. The Fed is not ignoring sentiment surveys, supply disruptions, or household and business decision paralysis. Given the remarkable degree of uncertainty and potentially divergent mandates, the FOMC must respond in the present to what is and not what might be. With its employment aims largely satisfied and work left to do on inflation, holding a modestly restrictive policy stance is consistent with the Fed's statutory goals and leaves them in a "good place" with considerable flexibility to react as and when appropriate.
The Chair ruled out preemptive easing because contemporaneous data do not call for it. Moreover, further clarity on trade and other policies is needed to determine the appropriate monetary course. A June cut is out, and in all likelihood so is July. Even September may be premature - the consequences of already-announced tariffs and federal spending cuts may evolve over quarters and not be evident until the Fall. The next Summary of Economic Projections could very well show no median expectations for 2025 easing if adversarial trade policies become entrenched by the time of the June 17-18 meeting. The March SEP dots are very stale.
The Fed currently expects progress on achieving its dual mandate goals to stall or regress over the course of the next year. If employment and inflation goals were in tension (i.e., both unemployment and inflation moved higher in tandem), a difficult balancing act might favor holding rates as opposed to cutting them. The FOMC will strive to keep longer-term inflation expectations well anchored, as price stability is also a necessary condition for sustainable economic growth and labor market strength. That said, the Fed will respond to whichever mandate demands its attention. If rapidly deteriorating labor markets and a worsening recession obviate inflation fears, the Fed will intervene to support its employment mandate. We're not there yet. As Chair Powell observed, "We are just going to have to wait and see how it plays out."
Statement Comparison
Topic | January | March |
Economic Activity | "has continued to expand at a solid pace" | "" |
Labor Market | "conditions remain solid" | "" |
Inflation | "remains somewhat elevated" | "" |
Risks | "The Committee is attentive to the risks to both sides of its dual mandate" | "risks of higher unemployment and higher inflation have risen" |
Economic Outlook | "uncertainty [...] has increased" | "uncertainty [...] has increased further" |
Additions:
Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.
Uncertainty about the economic outlook has increased further.
[The Committee is attentive to the risks to both sides of its dual mandate] and judges that the risks of higher unemployment and higher inflation have risen.
Subtractions:
Recent indicators suggest that economic activity has continued to expand at a solid pace.
Uncertainty around the economic outlook has increased.
Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.
Apart from an acknowledgment of trade distortions to growth data, the Committee's characterization of activity, the labor market, and inflation did not change in the statement. Risks are oriented toward higher unemployment and higher inflation. Uncertainty continued to increase from March to May.
Although the Fed's characterization of the economic backdrop has not changed, the FOMC clearly flagged increasing uncertainty and intensifying downside risks. The latter have yet to materialize in so-called hard data.
Prepared Remarks
"Despite heightened uncertainty, the economy is still in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment."
"The risks of higher unemployment and higher inflation appear to have risen, and we believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments."
"Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment."
"Near-term measures of inflation expectations have moved up, as reflected in both market- and survey-based measures. Survey respondents, including consumers, businesses, and professional forecasters, point to tariffs as the driving factor. Beyond the next year or so, however, most measures of longer term expectations remain consistent with our 2 percent inflation goal."
"The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. The tariff increases announced so far have been significantly larger than anticipated. All of these policies are still evolving, however, and their effects on the economy remain highly uncertain."
"If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment."
"The effects on inflation could be short-lived—reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and, ultimately, on keeping longer-term inflation expectations well anchored."
"Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans."
"We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close."
"For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance."
Press Conference
Chair Powell offers many important insights and clarifications that are worth considering in context. Watching this press conference or reading a full transcript will be very helpful.
Waiting for Clarity:
"I think there's a great deal of uncertainty about, for example, where tariff policies are going to settle out and also when they do settle out, what will be the implications for the economy, for growth, and for employment. I think it's too early to know that. I mean ultimately we think our policy rate is in a good place to stay as we await further clarity on tariffs and ultimately their implications for the economy."
...
"But there's just so much that we don't know. I think -- and we are in a good position to wait and see, is the thing. We don't have to be in a hurry. The economy has been resilient. It is doing fairly well. Our policy is well positioned. The costs of waiting to see further are fairly low, we think. So, that's what we are doing. And, you know, we'll see the administration is entering into negotiations with many countries over tariffs. We'll know more with each week and month that goes by, about where tariffs are going to land. And we'll know what the effects will be when we start to see those things. So, we think we will be learning. I can't tell you how long it will take, but for now, it does seem like it's a fairly clear decision for us to wait and see and watch."
...
"You know it's going to depend. I think you have to just take a step back and realize, this is why we are where we are, is, you know, we are going to need to see how this evolves. There are cases in which it would be appropriate for us to cut rates this year. There are cases in which it wouldn't. And we just don't know. Until we know more about how this is going to settle out and what the economic implications are for employment and for inflation, I couldn't confidently say that I know what the appropriate path will be."
...
"My gut tells me that uncertainty about the path of the economy is extremely elevated and that the downside risks have increased. The risk is as we pointed out in our statement, the risks of higher unemployment and higher inflation have risen. But they haven't materialized yet. They really haven't. They are really not in the data yet. So, and that tells me more than my intuition because I think it's obvious, actually, that the right thing for us to do is - we are in a good place, our policy's in a very good place, and the right thing to do is await further clarity [...] usually things clarify and the appropriate direction becomes clear. That's what usually happens. Right now it's very hard to say what that would be. In the meantime, the economy is doing fine. Our policy isn't -- you know, it's not highly restrictive. It's somewhat restrictive. It's 100 basis points less restrictive than it was last summer so we think it's in a good place and we think the appropriate thing is for us to wait and see and get more clarity about the direction of the economy."
...
"And remember, there will be two effects. One of them would be weakening economy, weakening economic activity which translates into higher unemployment. And the other would be potentially higher inflation. Again - to say it again, the timing, the scope, the scale and the persistence of those effects are very, very uncertain. So it's not at all clear what the appropriate response for monetary policy is at this time. And by the way, our policy is in a good place, so we think we can wait and move when it is clear what the right thing to do is. Really not at all clear what it is we should do."
...
"So I really wouldn't want to try to make a specific projection for where we are relative to that. We will in six weeks, we have the June meeting, and you will have another SEP. I'm not going to hazard a guess here today as to what it would be. Again, what I would say is that we think our policy rate is in a good place. We think it leaves us well positioned to respond in a timely way to potential developments. That's where we are. And that depending on the way things play out, that could include rate hikes -- sorry, rate cuts. You know, it can include us holding where we are. We just are going to need to see how things play out before we make those decisions."
...
"You know, I think once you have a direction, a clear direction, you can make a judgment about how fast to move and that kind of thing. So, it's really - the harder question is the timing, I think, and when will that become clear. And fortunately as I mentioned, we have our policy in a good place, the economy is in a good place, and it's really appropriate, we think, for us to be patient and wait for things to unfold, as we get more clarity about what we should do."
Policy Context and Stance:
"We have an economy that if you look through, you know, the sort of distortions in Q1 GDP, you still got an economy that looks like it's growing at a solid pace, the labor market appears to be solid. Inflation is running just a bit above 2%. So it's an economy that's been resilient and is in good shape and our policy is sort of modestly or moderately restrictive. It's 100 basis points less restrictive than it was last fall. And so we think that leaves us in a good place to wait and see. We don't think we need to be in a hurry. We think we can be patient. We are going to be watching the data. The data may move quickly or slowly. But we do think we are in a good position where we are to let things evolve and become clearer in terms of what should be the monetary policy response."
...
"We have had, you know, unemployment in the low fours for more than a year, we have had inflation coming down, now in the mid to low twos. And we have had an economy growing at 2 1/2%. That is the economy as we see it now. What looks likely, given the scope and scale of the tariffs, is that we will see - certainly the risks to higher inflation, higher unemployment have increased and if that's what we do see and if the tariffs are ultimately put in place at those levels, which we don't know, then we will see -- we won't see further progress toward our goals. We might see a delay in that. I think in our thinking, we would never -- we never do anything but keep achieving those goals. But we would at least for the next, let's say, year, we would not be making progress toward those goals. Again, if that's the way the tariffs shake out. The thing is, we don't know that. There's so much uncertainty about the scale, scope, timing and persistence of the tariffs."
...
"We had coming out of the March meeting, we, the public generally had an assessment of where tariffs were going. And then April 2 happened and it was really substantially larger than anticipated in the forecasts that I had seen and in our forecasts. So, and now we have a different -- we are in a new phase where it seems to be - we are entering a new phase where the administration is entering into beginning talks with a number of our important trading partners and that has the potential to change the picture materially or not. And so I think it's going to be very important how that shakes out. But we simply have to wait and see how it works out. It certainly could change the picture and we are mindful of not trying to make conclusive judgments about what will happen at a time when the facts are changing."
...
"The labor market is solid. Inflation is low. We can afford to be patient as things unfold. There's no real cost to our waiting at this point. Also, the sense of it is, we are not sure what the right thing will be. There should be some increase in inflation, there should be some increase in unemployment. Those call for different responses. And so until we know -- potentially call for different responses. And so until we know more, we have the ability to wait and see. And it seems to be a pretty clear decision. Everyone on the committee supported waiting. And so that's why we are waiting."
(Not) Moving in June:
"You know, as I said, we are comfortable with our policy stance. We think we are in the right place to wait and see how things evolve. We don't feel like we need to be in a hurry. We feel like it's appropriate to be patient. And when things develop, of course, we have a record of we can move quickly when that's appropriate. But we think right now the appropriate thing to do is to wait and see how things evolve. There's so much uncertainty. If you talk to businesses or market participants or forecasters, everyone is just waiting to see how developments play out. And then we'll be able to make a better assessment of what the appropriate path for monetary policy is. So, we are not in that place, and you know as that develops, and - I can't really give you a time frame on that."
...
"It's not a situation where we can be preemptive because we actually don't know what the right response to the data will be until we see more data."
Balancing Dueling Mandates:
"With the labor market, we would look at the totality of the data. We would look at the level of the unemployment rate, we would look at the speed with which it's changing. We would look at the whole huge array of labor market data to get a sense of whether conditions are really deteriorating or not. And at the same time, we would be looking at the other side of the mandate. We could be in a position of having to balance those two things, which is, of course, a very difficult balancing judgment that we would have to make."
...
"But the situation is if the two goals are in tension, so let's say that unemployment is moving up in an uncomfortable way and so is inflation. Not the situation we are in - hypothetically. But we would look how far they are from the goals, how far they are expected to be from the goals, what's the expected time to get back to their goals. We would look at all those things and make a difficult judgment and that's in our framework. It's always been in our thinking. We haven't faced that question in a very long time. And so, again, difficult difficult judgment to make. And not one that we face today. And we may never face it. But, you know, we have to be keeping it in our thinking now."
...
"This is the issue with the two goals being in tension. It's a very challenging question. Now, there can be a case in which one goal is very far, one variable is very far from its goal, much farther than the other, and if so, you concentrate on that one. And frankly, that was the case -- well, it wasn't a case where they were really in tension. But if you go back to 2022, it was very clear that we needed to focus on inflation. The labor market was also super tight. So it wasn't really a trade-off. You know, I think you know what our framework document says. It says we will look at how far each variable is from its goal and also we will factor in the time it would take to get there. So, that's going to be potentially a very difficult judgment. But the data could break in a way that it's not. I just don't think we know that. The data could easily favor one or the other. And right now there's no way to -- no need to make a choice and no real basis for doing so."
...
"Now we have a situation where the risks to higher inflation and higher unemployment have both gone up as we noted in our statement. And we have got to monitor both of those. We actually have a potential situation where there may be a tradeoff or tension between the two - potentially. We don't have it yet. And we may not have it."
...
"I'm not going to try to give you a specific number. I will just say, we have to now be looking at both variables. And which of them is demanding, if one of them is demanding our focus more than the other, that would tell us what to do with policy. If they are more or less equally distant and equally or not distant, then we don't have to make that assessment. You know, the assessment is you wait. So, I'm not going to try to be really specific about what we need to see in terms of a number. But, look, if we did see, you know, significant deterioration in the labor market, of course, that's one of our two variables and we would look to be able to support that. You would hope that it wasn't also coming at a time when inflation was getting very bad. And, again, we are speculating here. We don't know this. We don't know any of these things. It's very hypothetical. We are just going to have to wait and see how it plays out."
Feelings vs. Reality:
"And businesses and households very broadly are concerned and, you know, postponing economic decisions of various kinds, and, yes, if that continues, nothing happens to sort of alleviate those concerns, then you would expect that to begin to show up in economic data. It wouldn't maybe show up overnight. But it would show up over weeks and months. And that may be what happens. But it hasn't happened yet. And also there are things that can happen that will change that narrative. I mean, they haven't happened, but it's possible to imagine things that - but in the meantime, yes, we are watching it extremely carefully like everybody is but don't see really much evidence of it in actual economic data yet. And by the way, consumers keep spending, credit card spending, it's you know still a healthy economy albeit one that is shrouded in some very downbeat sentiment on the part of people and businesses."
...
"Well, so we really don't see in the data yet big economic effects. We see sentiment, there are concerns that higher prices may be coming or things like that. So, people, they are worried now about inflation. They are worried about a shock from the tariffs. But they really haven't -- that shock hasn't hit yet. Okay. So, you know we are going to be looking at not just the sentiment data, but also the real economic data as we assess what it is we should do [...] So, people are feeling stress and concern, but unemployment hasn't gone up, job creation is fine. Wages are in good shape. You know, people are not -- layoffs -- people are not getting laid off at high levels. Initial claims for unemployment are not increasing in any kind of impressive way. So, the economy itself is still you know in solid shape."
...
"You know I think going back a number of years, the link between sentiment data and consumer spending has been weak. It's not been a strong link at all. On the other hand, we haven't had a move of this you know speed and size. So, it wouldn't be the case that we are looking at this and just completely dismissing it. But it's another reason to wait and see."
Sources
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