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Fed Cautiously Optimistic on Inflation, “Wait and See” on New Administration Policies
The Fed holds rates steady, with Chair Powell expressing cautious optimism on inflation while acknowledging uncertainty around tariffs, immigration, and the labor market.
- Markets & Economy
- Central Banks
- Monetary Policy
- Federal Reserve
Key Points
What it is
Rates remain unchanged and Powell outlined two key factors for a potential rate cut: continued improvement on inflation or signs of labor market weakness.
Why it matters
While Powell expressed cautious optimism on inflation, he stressed uncertainty around policy changes, reinforcing a data-driven approach to future decisions.
Where it's going
The Fed is in a “wait-and-see” mode, watching inflation and employment trends to determine if and when a rate cut is warranted.
The Fed’s decision to leave its policy stance unchanged this month came as no surprise, with only minor changes made to the policy statement. The most interesting insights came from Chair Jay Powell’s press conference. He sounded optimistic on inflation, although, when asked about how tariffs might affect inflation going forward, he cautioned that the “range of possibilities is very, very wide.” More generally, he painted the picture of a Fed in wait-and-see mode, including regarding the effects of immigration policies on the labor market. Let’s take a closer look.
Powell outlined two conditions that would warrant a further progress on inflation or a weakening labor market. On inflation, he sounded cautiously optimistic, pointing to a steady decline in owners’ equivalent rent and housing services inflation. On the labor market, he stated multiple times that it does not need to “cool off anymore” and that the Fed is watching it “extremely carefully” because “it is one of our two goal variables.”
Powell was repeatedly asked how the Fed might respond to the Trump administration’s new policies, particularly tariffs and immigration. On tariffs, he highlighted the many unknowns, including which goods will be affected, the duration and rate of the tariffs, the countries involved, potential retaliation, and how the effects, in his words, “will transmit through the economy and consumers.” He implied that tariffs may not necessarily lead to higher inflation at the consumer level, and stated that “there are lots of places where the price increase from the tariff can show up between the manufacturer and the consumer.”
Regarding immigration policies, he acknowledged reports that businesses that rely on immigrant labor are finding it harder to hire. But he stated that these effects have not yet appeared in the data. He also noted that if immigration slows while the labor market is cooling, the net result could be a stable unemployment rate. Overall, a recurring theme in Powell’s remarks was a wait-and-see posture, waiting for policy details so it can then assess the potential effects on the outlook for inflation and the labor market. So, for now, all eyes are on the new administration.
The Federal Open Market Committee (FOMC) of the Federal Reserve holds eight regularly scheduled meetings a year to review economic and financial conditions and determine monetary policy. It sets the federal funds rate target, which is achieved through open market purchases by the Federal Reserve and has a broad impact on interest rates in the financial system and the economy. The committee consists of 12 members from regional reserve banks.
Main Point
No rate moves, Fed remains watchful
The Fed held rates steady, with Chair Powell expressing cautious optimism on inflation while watching tariff, immigration, and the labor market. He signaled a “wait-and-see” approach, with future moves depending on economic data.
The Price of Progress
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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