Heading into Wednesday's Federal Open Market Committee meeting, the question is not what the group will do, but rather what it will say.
In what has been a signature of post-pandemic monetary policymaking, Federal Reserve officials broadcast their policy intentions — holding short-term rates steady between 4.25% and 4.5% — well in advance of this week's meeting.
What remains to be seen from the FOMC's policy statement and forecasts, as well as Fed Chair Jerome Powell's ensuing press conference, is what the central bank intends to do in the months ahead and, critically, what its reaction function will be in the face of sweeping economic uncertainty.
"Among a flurry of activities that have economic implications, the new administration's tariff policies and efforts to shrink the federal government seem to have the most influence — for now — on market sentiment," said Chris Stanley, who leads the banking industry practice at the analytics firm Moody's. "It's a big jump from market correction to a recession, but the Fed is confronting a very different growth picture today than the last time they met."
In an analysis note, Stanley advised bankers to plan on no rate cuts for 2025, but to also maintain "an agile, multi-scenario balance sheet playbook."
Should rates remain unchanged through the end of the year, that would be a significant departure from the Fed's policy expectations coming into this year. During its December meeting, FOMC members largely predicted that they would cut rates twice in 2025. And, just a few weeks ago,
FOMC members are set to update their quarterly economic projections during today's meeting, giving the market fresh guidance about what to expect in the months and years ahead.
Waller and other FOMC members have said the Fed will not lower its policy rate until it sees either a sustained drop in inflation or significant softening of the labor market. Government reports showed a
The concern among some economists is that the Fed will feel compelled to cut rates preemptively should the economy start to decline. Early warning signs, including falling 10-year Treasury yields, gloomy consumer sentiment surveys and the Federal Reserve Bank of Atlanta's GDPNow tool, suggest that recession risks are on the rise. But, for now, consumer spending remains strong and the labor market continues to add more than 100,000 jobs monthly.
Mickey Levy, an independent macroeconomic consultant and visiting scholar at the Hoover Institution, said an economic downturn paired with persistent inflation could put the Fed in the uncomfortable position of having to choose between its two statutory mandates: bolstering the labor market and keeping prices stable.
"History suggests the Fed will ease monetary policy in response to the negative impacts of the tariffs on the economy and labor markets," Levy told American Banker. "But in doing so, it could elevate inflation even higher and compound the costs of the tariffs."
