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.
The Federal Reserve’s (Fed) last rate cut occurred in December, and we don’t expect to see another cut until later this year at the earliest. Futures market is pricing in only a 15% chance of a rate cut by the September FOMC meeting and about a 30% chance of a cut before year-end. Recent Fed communications have been modestly hawkish, reflecting an uptick in inflation and uncertainty tied to the Iran war. That said, policymakers are mindful of how quickly conditions can change and are closely monitoring signs of softening in the labor market. Fed leadership may also lean toward caution, as Jerome Powell will continue to serve as Fed Chair until his nominated successor, Kevin Warsh, is formally confirmed by the Senate.
Recent economic data points to a mix of softening labor market conditions and rising inflation pressures. While payroll growth accelerated to 178,000 jobs in March, much of the increase reflected a rebound from February’s 133,000 decline, leaving the average monthly increase at just 15,000 over the past six months. While the pace of hiring has slowed, layoffs remain low, and the unemployment rate is stable at 4.3%. Inflation has moved higher amid higher energy prices from the Iran war and lingering tariff effects. Headline CPI inflation climbed back above 3% year-over-year (Y/Y) in March, with energy prices surging 10.9% during the month. Durable goods prices have also seen a noticeable uptick over the past year. Meanwhile, the Fed’s preferred inflation gauge, the core PCE price index, remains elevated at 3% Y/Y, above the Fed’s 2.0% target.
A near-term rate cut is unlikely. While energy-driven inflation pressures could ease in the second half of the year if Middle East tensions cool, the outlook remains uncertain for now. As a result, we are maintaining the Fed-O-Meter at its current position.
