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 (Fed) has maintained interest rates at a target range of 4.25% to 4.50% since December, and rates are expected to remain in that range for the foreseeable future. Fed Chair Jerome Powell is encouraged by the economy’s resilience and the gradual downshift of inflation. However, the Fed is hesitant to cut interest rates because of the unpredictable impact of tariffs on both economic growth and inflation. At present, the Fed is opting for a “wait-and-see” approach.
The Fed has a dual mandate to achieve maximum employment and stable inflation over the long run. The Fed’s hesitancy to cut interest rates is because of economic uncertainty in the months ahead. Policymakers need time to assess the impact of tariffs on labor market growth and inflation before making adjustments. While inflationary pressures have cooled, labor market conditions remain solid, though the pace of hiring has moderated. The unemployment rate held steady at 4.2% in April, and labor market growth was stronger than expected. Although job growth is easing this year, jobless claims remain low. On the inflation front, forward-looking indicators from manufacturing and service firms suggest rising price pressures, while backward-looking data show signs of cooling inflation. Headline CPI inflation slowed to 2.3% year-over-year (Y/Y) in April, the lowest since February 2021, while core CPI held steady at 2.8% Y/Y.
The Fed is unlikely to cut interest rates at its upcoming FOMC Meeting in June. Policymakers are waiting for more clarity on how tariffs will impact the broader economy and inflation before adjusting interest rates. For now, we are maintaining the Fed-O-Meter in its current position.