The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
At its June FOMC Meeting, the Federal Reserve (Fed) maintained rates at a range of 4.25-4.50%. Rates have not been adjusted since the 0.25% rate cut last December. While the updated Fed Dot Plot reaffirmed expectations for two rate cuts by year-end, the Fed also lowered its GDP forecasts for 2025 and 2026, while raising its projections for inflation and unemployment. At the post-FOMC press conference, Fed Chair Jerome Powell said the Fed expects inflation to pick up “meaningfully” in upcoming months due to tariffs and “some of it will fall on the end consumer.”
While tariffs could eventually increase inflation, their impact has not been felt at this point. The consumer price index (CPI) rose just 0.1% M/M in May, coming in below the expected +0.2% monthly increase. A few tariff-sensitive categories like new cars and apparel saw price declines last month, while major appliances saw a 4.3% monthly increase. The consumer price index is up 2.4% year-over-year (Y/Y). Businesses built up inventory levels ahead of the initial tariff implementation, so it may take time for these costs to pass-through to consumers. This is a key reason why the Fed is remaining patient. Meanwhile, the labor market is still growing but at a slower pace. The 12-month average fell to a cycle low of 144,000, down from 184,000 a year ago. The economy has added an average of 124,000 new jobs per month this year. While hiring has moderated, employment growth is still healthy enough for the Fed to take a wait-and-see approach until the full economic impact of tariffs becomes clearer.
We are unlikely to see a change in Fed policy at their next FOMC Meeting in late July. More time will be needed before the Fed has enough data to assess the impact of tariffs. The fed funds future market is currently pricing in a greater than 50% probability of a rate cut in September and a more than 90% probability of at least one rate cut by year-end. In light of this, we are keeping the Fed-O-Meter unchanged.
