���㣨Leyu����������

May 7, 2025

The Federal Open Market Committee (FOMC) �� the policy setting arm of the Federal Reserve �� voted unanimously to hold rates at the current 4.25% to 4.5% range in May. The statement following the decision underscored the tariff hedging that distorted growth in the first quarter. The underlying growth in the economy was stronger than the 0.3% contraction in real GDP growth for the period suggested.

Inflation has cooled but upward revisions to January and February made the March improvement less reassuring than initially hoped. The labor market remained on solid footing, with payrolls continuing to expand, albeit at a slower monthly pace since the start of the year than in 2024.

The statement continued to emphasize the high level of uncertainty regarding the trajectory of both inflation and unemployment. The risks for inflation and unemployment are both to the upside, reflecting the stagflation associated with the tariff levels that have been announced.

Chairman Jay Powell emphasized his commitment to ensure any bump in inflation due to a rise in tariffs will be temporary. He acknowledged that the two goals of the Fed �� stable prices and full employment �� could come into opposition. He could not say which goal would dominate if the two policies came into tension with each other.

He emphasized that the Fed is in a good position to await “further clarity�� on how the economy evolves before moving. Currently, waiting has few costs. It is a good time to “wait and see and watch.��

He did say that the Fed cannot act preemptively to cut rates as it might have done in the past, given the uncertainty regarding tariffs and their potential impact on both sides of the Fed’s dual mandate. He emphasized a lot of data dependence for now.

Powell underscored that political pressure to cut preemptively from the administration plays no role in the Fed’s decisions. He reiterated that the right thing to do at the moment is to wait for further clarity on the course of the economy before deciding the next move. In the meantime, the economy is doing fine.

Powell struck a tone of humility about policies post-pandemic. He said the Fed could have tapered on quantitative easing and raised rates sooner. That is an important part of introspection. It provides lessons and can inform you on how to reshape policy decisions going forward.

Powell emphasized that he did not think it was his job to give Congress advice on fiscal policy. He mentioned that it was not Congress�� place to tell the Fed what to do on monetary policy. (Touché. There was an audible laugh with that comment.)

One notable detail that is worth noting is that Powell would not verify that he would step down from his board position after his tenure as Chairman expires in May 2026. We have only had one former Fed Chairman stay on in his board position as a governor after leaving the chair’s position. That was Thomas McCabe who clashed with President Harry Truman.

McCabe was famously replaced by William McChesney Martin, who was thought to be a Truman loyalist. That turned out to be wrong. Martin is the one who famously coined the phrase that it was the Fed’s job to pull the punch bowl away just as the party is “really warming up.��

That refusal by Powell to say he would vacate his Board position, which goes until January 2028, is important. It suggests that the Chairman may consider staying on the Board to prevent an erosion in the Fed’s independence, if it appeared imminent.