SPECIAL REPORT: Reaction To Today's Federal Reserve Guidance | Axel Merk

My notes on today' news + a live discussion (with audience Q&A) at 5pmET

A few hours ago, the Federal Reserve Open Market Committee released the outcome of its meeting this week, keeping its policy rate unchanged (as expected) as well as the pace of its Quantitative Tightening program.

And just a little while ago, Fed Chair Jerome Powell just wrapped up his press conference related to this release. The market’s reaction (so far) has been moderately positive.

My bullet-point notes to Powell’s conference are below.

And I’m also happy to announce that Fed-watcher Axel Merk is joining us again to deliver his expert reaction to the Fed’s latest guidance as well as take your questions live.

This live event with Axel will take place today at 5pmET/2pmPT and can be accessed via this link or by clicking on the image below:

If you missed the event while it was happening, clicking on the above link/image should take you to a replay.

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Here are the key points I captured from Jerome Powell’s press conference:

POWELL’S PREPARED REMARKS

• Despite elevated uncertainty, the economy remains in a "solid position"

  • unemployment rate is low

  • labor market is at/near maximum employment

  • inflation has come down a great deal, though still slightly higher than 2% target

  • Fed’s current monetary policy stance leaves it well-positioned to respond in a timely way to economic developments

• GDP edged down in Q1 due to tariff front-running — this has complicated GDP measurement

  • PDFP (which excludes net imports and government spending) grew at +2.5%

  • Growth in consumer spending moderated, while investment in equipment & intangibles rebounded higher

  • Surveys of businesses & consumer households show a decline in sentiment, largely reflecting trade policy concerns

  • The Fed predicts median 2025 GDP growth of +1.4%, and +1.6% for 2026 (somewhat slower than its projections back in March)

• Labor market conditions have remained solid

  • Payroll jobs gains are averaging +135,000/mo over past 3 months

  • 4.2% unemployment rate is low and steady

  • Wage growth has continued to moderate, while still outpacing inflation

  • Conditions in labor are broadly in-balance & consistent with maximum employment

  • The labor market is NOT a source of significant inflationary pressures

  • The Fed predicts median 2025 unemployment rate of +4.5%, and +4.5% for 2026 (somewhat higher than its projections back in March)

• Inflation has eased significantly from its mid-2022 highs, but remains elevated vs Fed’s 2% goal

  • Total PCE rose +2.3%YoY

  • Core PCE rose +2.6%YoY

  • Near-term inflation expectations have moved up due to tariff concerns

  • Longer-term inflation expectations are consistent with Fed's 2% target

  • The Fed predicts median PCE rate of +3.0% (somewhat higher than its projections back in March), and +2.4% for 2026, and +2.1% for 2027

• Fed is leaving its policy interest rate unchanged at 4.25-4.5%

• Fed is making no changes to its current pace of balance sheet runoff (aka QT)

• The Trump admin's policies -- trade, immigration, fiscal policy & regulation -- have created uncertainty.

  • The impact of tariffs will ultimately depend upon their final levels

  • Tariff concerns reached a peak in April, but have since declined

  • Increases in tariffs this year are likely to push up prices and slow economic activity

  • The effects on inflation could-be short lived; though they could also be more persistent — it will depend on several factors.

• Our obligation is to keep long-term inflation expectations well-anchored and not do anything that could add to the potential inflationary impact of tariffs. We aim to keep their impact to a 1-time event, and not an ongoing source of inflationary pressure.

• The Fed could find itself in a situation where its two mandates -- price stability & maximum employment -- could be at odds. If that happens, we'll prioritize the one that's most distorted from its normal average.

• The Fed updated the SEP (it’s dot-plot) - the median Fed Funds rate for year-end 2025 is 3.9%. Here’s what it currently looks like:

• Uncertainty is unusually elevated right now. The Fed is continuing its 5-year review. Will be wrapped up by late summer.

MEDIA Q&A

• NYTimes: Has the lower-than-expected impact of tariffs so far changed your outlook on inflation?

  • That’s welcome news

  • Services inflation has been grinding down for a long while, which is helping

  • Goods inflation is picking up a little bit. We expect this to increase over coming months from tariffs.

  • Many companies say they are planning to pass along all/most of these tariff costs

  • Dot-plot shows Fed officials expect inflation to increase in short term (from tariffs) and then come back down

• Reuters: This latest Dot Plot is a slower path to rate cuts than before. Why? How can you justify that risks have diminished?

  • Growth has slowed since March, and inflation has ticked up slightly (from tariffs)

  • We’re adapting in real time as tariffs forecasts change

  • Many surveys say that “uncertainty” (not necessarily “risks”) is diminishing

• AP: What not cut rates more immediately? Is the job market worsening? How about the housing market? Will tariffs destroy demand?

  • We monitory all those things, but unemployment is low, the economy is still growing

  • The housing market is a longer term problem. The best thing we can do for it is to help with price stability and keep unemployment low.

  • The jobs market is healthy. Perhaps a slow cooling, but its in a good place.

  • We are actively discussing whether tariffs will be inflationary or not. We’ll react as things get clearer.

• Steve Liesman/CNBC: How do you get to a place where you’re confident in your inflation and unemployment goals to make rates less restrictive?

  • Hard to say when, though we’re confident the time is coming

  • Right now, we want to “watch and learn”. We still need to see what the impact of the tariffs will be. Final tariffs rates and the degree of passthrough will be critical to learn.

  • We have to humble: rely on data vs forecasts

• Nick Timiraos/WSJ: Are the changes in the dot plot due to differences of opinion of the direction of policy? Why wouldn’t it be better to rates at a more neutral setting given the uncertainty of the data?

  • There’s a lot of fog in the forecast right now + we have a healthy diversity of opinions = differences on expectations

  • No one holds these dots with a lot conviction. Expect them to continue to be changed.

  • We have to be forward looking. Everyone we talk to is concerned about inflation. So we don’t want to be neutral in the face of that. We have time/wiggle room to wait to get more clarity.

• Bloomberg Radio&TV: Trump keeps lobbing insults at you. Is this just noise we should ignore, or does this make folks more worried about the outlook for the economy?

  • Everyone on the FOMC wants the economy to be healthy. It has been resilient so far. That’s all that matters.

• Andrew (didn’t announce source): Will impact will ICE workplace raids have on the economy?

  • We don’t comment on immigration policy.

  • The unemployment rate has been low for a long time. Labor demand and supply are slowly diminishing — not in a bad way — and as long as they move together, all should be OK

  • We’re looking at ways to improve the clarity of our communication to the public

• CBS News: What made you feel comfortable cutting in December, but you’re not cutting now? Consumers are looking for relief on rates — what will be tipping point for rate cuts?

  • We had confidence in Dec that inflation was heading down

  • Since then, we’ve learned that tariffs will be larger than initially expected at the start of the year. This likely means higher inflation.

  • Best thing we can do for households is sustainably get back to our 2% target & keep unemployment low. Our job would be easier without tariffs — we would have likely cut already.

• (no announced source): Should Americans expect some sort of economic pain in the back half of 2025?

  • No, I’m not saying that at all

  • But we do know that some percentage of tariffs, maybe a big one, will be passed along to consumer households

  • That said, people are less freaked out about tariffs than they were two months ago

• Bloomberg: Is the Fed overstaffed or should it be reduced in size?

  • We are careful stewards of public resources. I think a careful 10% streamlining of our resources (via buyouts) is in order over the next few years.

  • No one should notice any decline in our performance.

• FT: Any thoughts on fiscal policy?

  • We take fiscal policy as fully exogenous. We’ll wait and see.

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Let me know in the Comments below if you appreciate special opportunities like this, reacting to breaking developments.

I’m constantly thinking of ways to increase the value I can deliver to my Substack audience.

Hope to see you at the live Q&A!

cheers,

Adam

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