Monetary policy effectiveness relies on public understanding, and journalists play a key role in this. The Fed’s focus remains on achieving maximum employment and stable prices amidst rising uncertainty.
The economy shows solid growth, with the unemployment rate at 4.2% and payrolls increasing by 150,000 jobs monthly. However, inflation remains above the 2% target, currently at 2.5% for PCE prices and 2.8% for core PCE prices.
Economic Outlook And Trade Policies
The economic outlook is influenced by the new Administration’s policies, particularly on trade. Higher tariffs are expected to raise inflation, but longer-term expectations remain aligned with the 2% goal, which the Fed aims to sustain.
The Fed plans to monitor incoming data and adjust monetary policy accordingly, remaining cautious amid the uncertainty. Ensuring a stable economy is vital to avoid the adverse effects of high unemployment and inflation.
With Powell emphasising the importance of clear communication, it becomes even more apparent how sensitive rate policy is to both perception and reaction. While headline inflation figures appear to be narrowing their gap with the target, core readings tell us another story. A 2.8% core personal consumption expenditures (PCE) rate signals that pricing pressures in less volatile segments—those less influenced by food and fuel—are proving slow to subside. That stickiness won’t escape policymakers.
What the incoming figures tell us, then, is less about where we are and more about how bumpy the road ahead could become. A sustained monthly jobs growth near 150,000, while by no means alarming, slows the momentum many expected earlier this year. Labour markets aren’t flashing signs of dangerous overheating, yet they’re not cooling in the way a central bank eager to tame inflation might prefer. As such, rate cuts remain off the table for now, barring any sharp deterioration in either employment or demand indicators.
Yellen’s remark on tariffs hints at longer-term structural considerations. Although higher import duties may push near-term prices up, they’ve only moderately dented expectations around longer-term inflation. Market-based inflation swap forwards remain anchored near 2%, a reflection of confidence in policy credibility. But if trade frictions deepen—especially with key partners—then pass-through effects on import costs, consumer prices, and business sentiment might force policymakers to reassess how much tightening is already baked into broader financial conditions.
In practical terms, the central bank is unlikely to move preemptively without clearer signs of any trend reversal. Traders would be well served by closely watching upcoming CPI and wage data, as these are more likely than FOMC rhetoric itself to shift rate expectations. The messaging, for now, is one of steadiness: no easing until the inflation path is clearly downward and not just temporarily subdued.
Fiscal Developments And Interest Rate Forecasts
Given this, it would be prudent to stay light on directional bets. Instead, we are leaning into positioning that benefits from volatility around key data drops, with particular attention to Treasury market reactions when monthly labour and inflation data are released. The front end of the curve is pricing in some normalisation ahead, but there’s space for repricing if core inflation surprises higher—especially as year-on-year base effects begin to fade.
Remember also that policy is not operating in a vacuum. Fiscal developments—particularly tied to infrastructure stimulus and debt ceiling negotiations—could reshape growth dynamics before rate paths shift. While Chair Powell’s stance remains data-dependent, the path between waiting too long and tightening too far is increasingly narrow.
As such, watching shorter-term interest rate instruments like SOFR futures and swap spreads around upcoming policy meetings offers a more focused view of where uncertainty sits. We continue to avoid excessive duration risk in the belly of the curve, preferring to monitor steepening potential as clarity returns on long-term inflation direction.
In uncertain periods like this, missteps in interpreting forward guidance can prove costly.
