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 heightened uncertainty, the economy remains in a "solid position"

  • unemployment rate is low

  • labor market is at/near maximum employment

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

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

• "Risks of higher unemployment & higher inflation have risen"

  • Current policy is well-positioned to handle this

• Q1's low GDP was mostly due to tariff front-running

  • was +3% if you back out spike in imports

• Surveys of businesses & consumer households show concern over economic outlook, largely reflecting trade policy concerns

• Labor market conditions have remained solid

  • Payroll jobs gains are averaging +150,000/mo

  • 4.2% unemployment rate is low and steady

  • Wage growth has moderated, while still outpacing inflation

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

• Inflation has eased significantly from its 2022 higher

  • Total PCE rose +2.3%YoY

  • Core PCE rose +2.6%YoY

  • Near-term inflation expectations are moving up due to tariff concerns

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

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

• Trump admin's policies -- trade, immigration, fiscal policy & regulation -- will have "highly uncertain" impacts. For example, tariffs are much higher than we expected.

  • If tariffs remain high, we expect a rise in inflation, an economic slowdown and a rise in unemployment

• 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

• 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 is continuing its 5-year review. Will be wrapped up by late summer.

MEDIA Q&A

• CNBC/Steve Liesman: Are you any closer to deciding which of your two mandates will need urgent care first?

  • Risks to both have risen from March. We don't yet know how this will shake out.

  • Our policy rate is in a good place for us to react.

  • The economy and labor market look solid. Our policy is moderately restrictive. We don't feel in a hurry to act.

• WSJ/Nick Timiraos: Lots of parts of the economy & housing look to be cooling. Beyond tariffs rising goods prices, what do you see that could nourish inflation sustainably over the coming year? Could you cut as soon as next month?

  • The underlying inflation picture is good, but there's so much we don't know about the impact the Administration's actions are going to have

  • We don't feel a rush to act. We'd rather see how this plays out before doing so.

  • We can move quickly when it's appropriate to.

• Bloomberg: Many economists are pricing in higher odds of a recession. Do you still the path for a "soft landing"

  • The latest economic stats look good

  • ...But the tariffs look like they could slow the economy further and delay the Fed from making progress towards its price stability and max employment goals. We'll have to wait and see.

  • We can't be pre-emptive yet, as we need to see which way the hard data starts moving in reaction to the Admin's actions

• NYT: How much weakness does the Fed need to see in order to cut?

  • We don't see any such weakness yet

  • We'd look at the totality of the data, not just one or two metrics.

• FOX Business: Given that inflation nudged up recently, tariffs are happening (inflationary), and the jobs market is strong -- should the Fed cut AT ALL this year?

  • We need more data to decide

  • Trump calling for rate cuts doesn't affect my job at all

• Reuters: What is your intuition telling you about the underlying direction of the economy?

  • Uncertainty is "extremely elevated" and downside risks have increased...but they haven't materialized in the data (yet)

  • In the meantime, the economy is doing fine & in a good place

  • If it's slowing down, that hasn't really hit the data yet

• Bloomberg Radio & TV: Fed has been criticized for "mission creep". Is that a fair critique?

  • That was a fair critique of the emergency steps we were forced to take during COVID

  • We will not be policy-makers regarding the climate. We are not spending a lot of time & energy on that.

• CBS News: The impacts of tariffs are showing up at ports. Business and households are complaining that they are feeling the pinch. What else do you need to see before acting?

  • We're not seeing this reflected (yet) in the hard data.

  • We're going to wait in order to act on indicators other than sentiment. it's not yet clear what any monetary response should be.

• AP: Last meeting you thought the Fed might cut 2x in 2025. Is that still the case?

  • Don't want to speculate at this point. We'll provide our next estimate in the SEP at the June FOMC meeting.

• Politico: Congress is debating spending cuts. Is there a danger that spending cuts could make a slowing economy worse?

  • The debt is on an unsustainable path. That's for Congress to fix. But I'm not going to give them advice on how to do fiscal policy.

• Washington Post: Many forecasters predict a rising unemployment rate. Does that worry you?

  • Will depend on the speed with which the unemployment rate rises

  • Right now the unemployment rate is really stable.

  • We might not act if the unemployment rate rises if inflation is picking back up. It depends on which mandate is under more stress.

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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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