The Fed cautions against higher unemployment and higher inflation.
FOMC Statement
Here is the Federal Reserve FOMC Statement for the May 6-7 Meeting.
Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
The Wall Street Journal comments
The policy changes pose a dilemma for the Fed, which has to decide whether to focus more on the potential for inflation to go up or more on the risk of rising unemployment.
“They’re in a bad situation,” said William English, a former senior Fed adviser. “If I were there, I would be suggesting that they stay put for now.”
Trump backed off an implied threat to sack Fed Chair Jerome Powell last month, but continued hectoring the central bank leader to reduce rates. “We have a stubborn Fed,” Trump said in a television interview aired Sunday. “He should lower them. And at some point, he will.”
Because the economy has just been through a period of high inflation, assuming that consumers and businesses will expect inflation to decline after an initial increase “is a bad risk for the central bank to take,” said Adam Posen, president of the Peterson Institute for International Economics.
“It is very ironic and, frankly, self-contradictory for people in or close to the administration who were critical about the Fed being too inflationary to also argue that the tariff shock is not going to have any effect on inflation,” Posen said. “It’s one or the other.”
Others fear that by holding rates steady as the economy slows, the Fed is setting up to keep rates unnecessarily high, risking a sharper downturn.
“The longer they’re on hold, the more they’re passively tightening,” said George Goncalves, head of U.S. macro strategy at MUFG, Japan’s largest bank. Waiting until July or September to cut rates raises the prospect the Fed will have to make larger, half-percentage-point cuts. “That’s just too long of a wait. You might lose that chance of really catching the economy,” he said.
No One Knows What Trump Will Do
No one know what Trump will do with tariffs, what Congress will do with the budget, or how the markets will react to whatever Trump and Congress do, so a decision to do nothing makes sense.
“The costs of waiting are low,” said Powell in the press conference.
We could easily see a significant bout of stagflation or a big deflationary crash. We could also see the first followed by the second.
I am not at all a Fed apologist, but assuming there is a Fed, hold was the right call.
Gold Soars to Another New High, What’s the Message?
Yesterday, I noted Gold Soars to Another New High, What’s the Message?
There are three messages. Do you see them?
Click the above link for three messages.
If you think we are headed for a currency crisis, then you are thinking correctly.
Don’t ask me when, because no one knows. But the message is unmistakable.