Will a Hope and a Prayer Be Enough for the Fed?

The Federal Reserve on Wednesday raised growth expectations, raised inflation expectations, and left interest rates unchanged.

From the Summary of Economic Projections, we learned that not a single member of the Federal Open Market Committee (FOMC) believes inflation is skewed lower. Instead, the number of members who see inflation risks weighted to the upside jumped from 12 to 17 (of 19). Uncertainty around growth also increased over the intermeeting period. Today, no member sees risks to growth weighed to the upside; instead, those believing risks are weighted to the downside grew from 8 to 14 members.

What should the committee do when the outlook is clear as mud?  Exactly what they did today: nothing – and hope for more clarity in future meetings.

About the only certainty we got from the FOMC decision and Chair Jerome Powell’s remarks was his statement that he intends to remain a Fed governor until the investigation into his own conduct related to renovations of the Fed building is “well and truly over with transparency and finality.” He declined to comment on whether he would remain beyond that point once his successor is named. The ball is back in President Donald Trump’s court in what appears to be politics testing central bank independence.

Returning to the economy and monetary policy, today’s meeting signals a Fed concerned about both sides of its dual mandate. Despite projecting higher growth and higher inflation – and little change in employment – the Fed chose not to move rates. Notably, no member signaled a belief that rates may move higher from here in 2026, while only one projects higher rates are likely in 2027 and beyond.  

For me, the Fed is signaling more concern about how inflation may affect growth than about inflation itself.  The longer the conflict with Iran pushes oil prices higher, the more likely that markets ask that same question in a more tangible way. 

10-Year Treasury Yield over the Past 12 Months

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