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
An hour ago, the Federal Reserve Open Market Committee released the outcome of its meeting this week, keeping its policy rate unchanged (as expected) but slowing 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 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.
Here are the key points I captured from Jerome Powell’s press conference:
POWELL’S PREPARED REMARKS
The economy is strong overall and we made significant progress towards our dual mandate goals of price stability and maximum employment
Inflation is solid, though somewhat elevated
We are keeping our policy interest rate unchanged
We also made the technical decision to slow the pace of QT pace
Economic activity expanded at a solid pace in Q4 with 2.3% GDP growth, but consumer spending is now moderating. Surveys of households and businesses are showing increased uncertainty.
We now forecast GDP to rise 1.7% and a little below 2% over the next two years
Labor market solid. Unemployment is low at 4.1% and has remained in a narrow range over the past year. the jobs-to-workers gap has remained steady for several months. Wages are growing faster than inflation and are not a source of upwards price inflation. Overall, the labor looks broadly in balance. The SEP projects the unemployment rate to be 4.4% at the end of 2025, and 4.3% over next two years.
Inflation is still above our 2% goal. Some near-term measures are moving up. Surveys are worried about tariffs. In future years, we see inflation coming down to our 2% goal. We raised our PCE inflation forecast to 2.7% for 2025 and 2.2% in 2026. It should reach our 2% goal by 2027.
The FOMC decided to maintain the Federal Funds rate at 4.25-.45%
The new Trump Administration is making big changes to trade, immigration fiscal policy and regulation -- we'll react to those changes once they're clearer. The current situation makes things uncertain. We will take our time to separate the signal from the noise.. We’re not in any hurry to change our policy stance.
Doing our Dot Plot exercise is challenging in this environment. Currently we forecast the Federal Funds rate to be at 3.9% at end of 2025 and 3.4% in 2026 (this is unchanged from Dec)
We’re not on a pre-set course. We will let the data guide us. We will take action as needed.
We are well-positioned to address whatever may happen.
We decided to slow pace of QT. Money markets have been showing some tightness. We’ve reduced our cap on US Treaurys down from $25bil to $5bil. We’re keeping the MBS cap as is, as we want to ultimately mostly only hold USTs.
The Federal Reserve will be on a listening tour while developing its next 5-year plan.
We remain committed to our dual mandate. We feel confident we'll hit our targets.
MEDIA Q&A
Reuters: How much of raised inflation expectations is due to tariffs? Are you looking at tariffs as a one-time shock to the economy?
Very difficult to be precise here. "Clearly some of it" is due to tariffs.
These may be transitory, but it will depend on how the trade wars unfold.
NYTimes: Are you less confident that inflation expectations are "well anchored"? How much weight do you put on consumer sentiment surveys as a leading indicator?
We are seeing increases widely in *short-term* inflation concerns. But we're not seeing much in longer term expectations.
Breakevens are flat to slightly down when you look 5 years out.
While consumer spending is moderating, it's still solid. Unemployment is low. So the hard data tells us things are pretty good. The relationship between survey data and real data hasn't been that tight over recent years. So overall, we're not too worried, but watching closely.
WSJ/Timiraos: [questions]. Why are there cuts in the SEP for 2025?
With tariffs, hitting our 2% will be delayed. But we'll get there.
The SEP cuts maintain because economic growth is slowing.
Things are really uncertain. We want to wait for further clarity and then determine how best to act.
Fox Business: 4.1% unemployment rate should bring people off the sidelines, but hiring rate is weak. Why? Any observable impact from the DOGE layoffs?
Hiring rate is indeed low. But so is the layoff rate. Which way does that break? We're waiting to see.
It's a good economy if you have a job. It's a tougher economy if you're looking for one.
But overall, we think the labor market is in balance.
We haven't seen much impact in the data yet from any of the DOGE layoffs yet.
Bloomberg News: The Fed's base case assumes tariffs will be "transitory". Wasn't the Fed wrong when it thought the COVID inflation would be "transitory"?
We don't think it's appropriate to tighten policy in advance of any real data showing us that tariffs are creating inflation
CNBC/Liesman: what wins out? Containing inflation or defending economic growth? Are you worried about a recession?
We have a dual mandate. We'll focus more on whichever one is farther from its target. Right now, we feel pretty good about both.
There's always a risk of recession (1 in 4 in the next 12 months historically). We don't make such a forecast. Some other firms who do are saying that the odds of recession are rising, but are still low.
AP: Last night Trump fired 2 officials from the Federal Trade Commission. Are you worried that he may fire anyone at the Fed?
No comment
Bloomberg Radio & TV: Wall Street is worried that the Fed will be "behind the curve" in its reaction function. How will you be able to stay ahead of things?
We will use our tools and act to the best of our ability.
As the President makes decisions, we will react and adapt as we go.
Washington Post: How tough has it been to sift the "signal" from the "noise" so far with the new Administration.
We look at what has the potential to impact economic growth, inflation or unemployment. We try not to worry about anything else.
We don't get too worried about any one piece of data. We like to wait until we see a clear trend developing.
This said, the heightened uncertainty -- especially with tariffs -- is making our job more challenging.
CBS News: Consumer sentiment has dipped dramatically. What is your message to concerned consumers? Why are you only planning to cut 2x this year if economic growth is slowing?
Grocery bill concerns are due to past inflation. We've got current/future inflation under control.
A little higher inflation and a little lower growth expectations kind of cancel each other out. So we're keeping our plan unchanged for now. But we're watching carefully.
Politico: Which tariffs are you most focused on? (announced ones, or ones to come)
We're not expecting PCE to change much. But the impact of tariffs are within that forecast.
We're cutting the pace of QT in half, which doubles the runway. Trying make as soft a landing as possible to the process.
FT: are inflation expectations indeed still "well anchored" given the survey concerns and the raise in PCE forecast?
When we talk about "well anchored", we're talking about the long term. In the short term, it's reasonable to expect expectations to change from month to month
Axios: Is there weakness in private jobs growth? Does the committee expect to taper MBS runoff?
Most of the past jobs creation in recent years was indeed driven by the government. From our standpoint, employment is employment.
We don't have a plan to taper MBS runoff? We want to get to $0 MBS on our balance sheet.
Economist: The economy has increasing growth risks and the market has been falling -- how confident are you that the Fed is "well positioned"? Could you pivot back to rate cuts in May?
Very confident we can move to react as needed. Less confident in our forecasts in such an uncertain year.
No commitments on rate cuts at this point.
CNN: you removed the line "roughly in balance". Are you now more concerned about inflation or unemployment? Are you concerned that market volatility with cause higher income households to start cutting back?
We're not sending any signal here. We're just cleaning up old language.
The more important risk is to economic growth.
We worry about things that will produce long lasting economic changes. So we don't worry much about short-term market gyrations.
Yahoo! Finance: Is the Fed willing to have a recession to beat inflation? Last month the idea of a $5k/household DOGE dividend was proposed -- what impact would that have?
Fortunately, we don't need to do that. We're pretty close to our 2% inflation goal and unemployment is low.
I don't see any reason to think we're repeating the 1970s.
No comment on the DOGE dividend idea
Agence-France Press: what impact will retaliatory tariffs have?
Hard to model out, but we have a "placeholder" for this in our model. We'll update it once we know more specifics about the tariffs
MNI Market News: why did you slow vs pause QT?
Everything thought slowing was more appropriate. Helps assure the path is smoother.
It was the TGA flows that got us thinking about moderating QT. What we've come up with is a broader solution. Gives us more time to make sure we land the plane.
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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It's funny that Powell says inflation is elevated when Danielle DiMartino Booth says that we're in deflation. He's not looking at the right numbers.
This is a nice summary. Keep up the good work