1. Monetary Policy & Rate Decisions
We are not in any hurry to move on current rates.We are at a place where we can cut or hold at what is clearly a restrictive stance of policy.On balance, people wrote down similar forecasts to last time, and it’s hard to know how this will work out; policy can move in the direction we need to. Appropriate to wait for further clarity, and costs of waiting are very low.If an inflationary impulse will go away on its own, it is not the right thing to tighten policy.If Fed’s goals need to be balanced against each other, it is challenging; that's not the current situation.2. Inflation & Tariffs
Inflation is still running in the 2%s, with a pickup from tariffs.Strong goods inflation readings in recent two months, if persistent, must do with tariffs.Tariffs tend to bring growth down and inflation up.We will know in a couple of months if higher goods inflation in the first two months of the year was from tariffs.Looking for direct evidence that particular pieces of inflation are caused, or not caused, by tariffs.Will be difficult to know how much inflation comes from tariffs; goods inflation moved up, and tracking that back to tariff increases is challenging but clearly tariffs are part of it. Too soon to say if it will be appropriate to look through effects of tariff inflation.Will depend on tariff inflation moving through quickly and on inflation expectations being well-anchored.Base case is that there is no policy signal from tariffs, but cannot know that.Inertia in changing forecasts amid high uncertainty.Some of the flatlining in Fed projections for core inflation this year is from tariffs.Housing services inflation has been behaving well and moving down in a good way.Base case is that inflation will be transitory; will depend on inflation expectations staying anchored.I am not dismissing rising short-term inflation expectations, but there’s no story of an increase in long-term expectations.Longer-term inflation expectations are mostly well-anchored; will be watching them carefully.We were getting closer to price stability, but with the arrival of tariff inflation, further progress will be delayed.Sentiment has fallen off, but the economy seems to be healthy.People are unhappy, and they are not wrong, that prices went up a lot.Drop in sentiment is partly due to big policy changes by the administration.Broadly speaking, forecasts point to weaker growth and higher inflation, which call for different responses. They cancel each other out.If soft data effectively becomes hard data, we will know very quickly, but we don’t see that yet.Fed wants to focus on hard data.Fed watches for material changes to financial conditions that are persistent.Policymakers widely raise their estimate of the risks to Fed goals.Forecasters have raised the possibility of a recession somewhat, but it is not high.
4. Balance Sheet & Liquidity
People came to be strongly in favor of slowing balance sheet shrinkage.This was a good time to slow balance sheet shrinkage.We said we will stop balance sheet shrinkage somewhat above the level that is ample.We are still far from that level and will approach it more slowly.Flows in and out of the Treasury General Account (TGA) got us thinking about balance sheet reductions.5. Labor Market & Employment
Hiring rate and layoffs are both low; a meaningful increase in layoffs would probably translate quickly into unemployment, and the overall labor market is in balance. Layoffs are meaningful to people involved, but not at a national level.Powell’s comments suggest the Fed is in a wait-and-see mode, with no urgency to adjust rates as uncertainty remains high. Inflation remains in focus, with tariffs playing a role in pushing prices higher, but long-term expectations remain anchored. The Fed sees sentiment declining but still views the economy as solid, with no immediate recession risk. There is a broad consensus to slow balance sheet reductions, and the labor market remains stable, though policymakers remain cautious about future risks.
This article was written by Greg Michalowski at www.forexlive.com. Read More Details
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