Increased Risks to Both Sides of the Dual Mandate

At Wednesday’s press conference, Chair Jay Powell signaled a wait-and-see approach, as the Fed keeps a close eye on inflation pressures and the job market.

Monetary Policy
Central Banks
Markets & Economy
Federal Reserve

Key Points

What it is

The FOMC opted to leave interest rates unchanged, with Chair Powell emphasizing that monetary policy remains well-positioned amid rising economic uncertainty.

Why it matters

For investors, a steady Fed funds rate can potentially influence borrowing costs, risk appetite, and how portfolios may respond to future changes in inflation or employment data.

Where it's going

The Fed’s decision to hold rates steady reflects a wait-for-clarity mindset, which means investors may need to stay flexible as the market responds to new data.

The decision today to leave the target range for the unchanged was widely anticipated. Market participants were keenly focused, instead on the tone of Chair Powell’s press conference, particularly in the aftermath of recent market volatility. We took the main message from today’s meeting to be that, while uncertainty around the near-term path for the economy has increased further--as have the risks to both sides of the FOMC’s dual mandate--the Committee views its monetary policy as well positioned to wait for further clarity on the direction of the economy.

The post-meeting policy statement indicated that, “Uncertainty about the economic outlook has increased further."¹ (our emphasis) Additionally, the Committee noted that “…the risks of higher unemployment and higher inflation have risen.”² The other changes to the statement were largely about acknowledging the recent data, clarifying that, “net exports have affected the data,³ or removing language that had become dated (the April announcement of changes to balance sheet policy).

Overall, the Chair’s press conference conveyed a message that the Committee believes that, “the current stance of monetary policy leaves them well positioned to respond in a timely way to potential economic developments.”⁴ Powell described the impact of the Administration’s policy announcements since the last FOMC meeting as, “still evolving…and their effects on the economy…highly uncertain.”⁵ If the Committee were to, “find [itself] in the challenging scenario in which [their] dual-mandate goals were in tension…[it] would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”⁶ With that said, the Chair went on to repeatedly emphasize that, “We [the FOMC] don’t think we need to be in a hurry. We think we can be patient.”⁷ When pressed on the impact of being patient on their next policy decision in June, Powell cited a track of moving “quickly when that’s appropriate, but…right now the appropriate thing to do is to wait and see.”⁸

Markets have been volatile since the March FOMC meeting, especially in early April. Federal Funds Futures at one point implied 25-basis-point (bp) cuts at both the June and July FOMC meetings, which we viewed as overly aggressive. Yields on United States Treasuries were little changed following today’s FOMC statement and the Chair’s press conference, while equity markets trimmed earlier gains. The futures-implied number of further rate cuts over the next twelve months remained at four 25-bp cuts – a bit more aggressive than our view that two or three ¼% cuts appear most likely.

What does this mean for portfolios we manage?

While the outcome of today’s meeting was widely anticipated, we took Chair Powell’s comments throughout his press conference as consistent with our own view that the Committee remains attentive to risks on both sides of their mandate. While uncertainty has undoubtably remained elevated, we view current rates as not too far off fair value and are therefore neutral duration across the portfolios we manage.

¹ Federal Reserve

² Federal Reserve

³ Federal Reserve

⁴ ibid

⁵ ibid

⁶ ibid

⁷ ibid

⁸ ibid

Main Point

Steady Policy in an Unsteady Environment

Based on Powell’s remarks, we believe the Fed is confident in its current stance and see patience as the right approach for now. With risks rising on both sides of the dual mandate, the Committee appears willing to wait for greater clarity, emphasizing flexibility over urgency in the months ahead.

Point of View

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Antulio N. Bomfim

Head of Global Macro – Global Fixed Income

Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.

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