A Fed Rate Cut May Be Near, But Not Today
The surge in macro uncertainty related to tariffs, including the possibility of a global trade war, has complicated the Fed’s already difficult task of setting interest rates to accommodate an unknown future. The added complication of factoring in how White House policy will evolve, and how that will influence future inflation and economic activity, is about as challenging as it gets when the main tool is the blunt instrument of adjusting interest rates.
The Fed, starting with today’s policy announcement at 2:00pm eastern, is “facing the most difficult challenge a central bank ever faces when the shock is both pushing up prices, in terms of imports, and reducing jobs, in terms of input costs. This is what tariffs do,” wrote former Treasury Sec. Larry Summers on Tuesday.
What to do when the stakes and uncertainty are high? Nothing sounds about right, at least for now. “The costs of being cautious are very, very low,” Fed Chairman Powell said earlier this month. “The economy’s fine, it doesn’t need us to do anything, really.”
Fed funds futures agree, and are pricing in a near certainty that the central bank will leave its 4.25%-to-4.50% target range unchanged today. The confidence for standing pat is moderately lower at an implied 80%-plus probability for the next FOMC meeting on May 7. A key question is whether today’s revised Fed economic projections, and Powell’s press conference, will change the calculus?
The policy-sensitive US 2-year Treasury yield has recently started pricing in higher odds for rate cuts by dropping below the median Fed funds target range–again. Earlier in the year, the 2-year was more or less trading in line with the median Fed funds rate, which suggested the market expected a steady policy. But in recent weeks the crowd revised its guesstimates and has turned dovish on the outlook.
