Is the Fed in Wait-and-Hope Mode?

Here are my most important takeaways from Federal Reserve’s Federal Open Market Committee (FOMC) meeting this week. The committee, which decides whether to hike, cut or maintain interest rates, voted Wednesday 9-2 to keep rates steady.

Key Takeaways

• A divided Fed kept rates unchanged at 4.25% to 4.5%, but notably there were two dissenters, which has not happened since 1993. I continue to believe that without a slowdown in the underlying economy, we are likely to see no cuts in 2025 as inflation remains higher than the Fed’s target rate of 2%.
• In the FOMC statement, the Fed suggested that growth has “moderated,” while the labor market remains “solid” and inflation remains “somewhat elevated.” I think the Fed has never been more clear: it believes that current policy is somewhat restrictive and appropriate with the employment picture strong and inflation stubbornly above policy targets.  
• The Fed remains in wait-and-hope mode. Why? I believe it’s because something has to change for the central bank to cut rates—either inflation has to fall to or below the Fed’s target or the labor market needs to show signs of weakness. However, I think the Fed has to hope that if those cracks start to appear in the economy, they are small enough to be quickly repaired.  
• Uncertainty over the economic outlook remains elevated. Chair Jerome Powell suggested prior to the FOMC meeting that the Fed would likely have already cut interest rates if it were not for tariff uncertainty. For me, the most important clarification Chair Powell gave this week is that he does not view uncertainty as decreasing now that many trade deals have been announced. My view is that we remain many months away from having more certainty as we have to wait until at least the release of third-quarter GDP data to see how tariffs are impacting the economy.  

Conclusion

The market’s initial reaction is appropriately to read this as a hawkish Fed. As I’ve suggested prior, the Fed wants to cut, but it needs the data to justify the move. I think we learned all we were going to learn from the FOMC meeting after Chair Powell’s answer to the first question during the presser: “The economy is not performing as though restrictive policy is holding it back inappropriately.” My translation: the Fed won’t move to cut rates until something changes in the economy. In my view, it is highly unlikely that inflation moderates significantly in light of continuing impacts from tariffs, which means the Fed needs the labor market to deteriorate while simultaneously hoping the downturn is minimal enough that lower rates can contain the damage.

I think it shouldn’t fall on deaf ears that we had two dissenters since we are indeed seeing signs that the underlying economy is weakening. However, this data remains anecdotal, while the hard data suggests that labor markets and broad conditions continued to show strength. While these two dissenters may prove prescient, we must remind ourselves the role of rates is to smooth business cycles, not to design them.

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