Fed Action: Very Little Good News for Macro

The FOMC language, Powell comments, adverse macro revisions, and “low confidence in forecasts” keeps the braille method going.

Mar 19, 2025

FOMC brings in new consulting team….

We see a guarded Fed view on growth and a finger in the air on inflation threats from tariffs with the updated projections vs. Dec projections for inflation edging up in both headline and Core PCE. Meanwhile, GDP growth in 2025 moved lower, unemployment edged higher and yet the target fed funds rate remain unchanged.
Inflation expectations was a fly in the ointment in the FOMC commentary when Powell used the term “well anchored.” Some consumers are increasingly worried about being strapped to that anchor as evident in the recent UMich metrics.
The dot plot shows the vote across the Gang of 19 calling for 2 cuts in 2025 with “9 dots,” but the voter turnout was solid for zero cuts with 4 and another 4 votes one cut. Based on our math, that is a close 9-8 votes with 8 saying fewer cuts and the other 2 dots in the 19 voters showing 3 cuts.

The FOMC session underscored the intrinsic unpredictability of the White House game plan on tariffs. The wide range of potential outcomes from the Trump tariff tantrums challenge estimates on how that will flow into the fundamental story line of prices, costs, and the knock-on effects into the level of economic activity (two-way volumes). We have looked at the logical flowthrough of widespread, high, and essentially punitive tariffs in an array of commentaries as well as documented evidence of retaliation risk and “retaliation to the retaliation.” We refer you to the tariff links at the bottom of the commentary.

The multiplier effects of total trade volumes (imports + exports) are very important to consider beyond the single metric fixation on trade deficits (see The Trade Picture: Facts to Respect, Topics to Ponder 2-6-25, Tariffs: Questions to Ponder, Part 1 2-2-25). The current White House culture is to focus on words like “rip-off” and “subsidies” with an unwillingness to get into the industry weeds and tackle the far more complex story line of “who wins, who loses.”

The reality is the existence of low-cost global supply chains and intertwined, integrated USMCA North American production has been decades in the making and cannot conceivably be unwound in a single Presidential term – let alone a year. Those debates will only be decided in the trenches and not on news channels or in press conferences.

The moving parts of inflation will face some challenges in goods and services, and the White House is presumably praying for an oil price collapse (return of Russian oil supply?) to help with headline inflation numbers. The dismal science of economics can be unforgiving on “price x volume” realities, the direction of unit costs, what it all means for demand, and how the retaliation from trade partners will affect the broader picture of GDP and payroll.

We clearly see the projections from the Fed today showing revisions from Dec 2024 calling for higher inflation in 2025, lower GDP growth, and a slight uptick in unemployment. What is less clear in the dot plot and negative variances from the Dec 2024 projections is what was driving the negative direction of the forecast revisions (Consumer? Tariffs? Deportation? Retaliation?).

The Fed had removed the following language from its latest statement: “the risks to achieving its employment and inflation goals are roughly in balance.” He was pressed on why that was taken out, and he basically said that language had a life expectancy that had run its course (or something to that effect). To us, that was not a real answer.

Housing Starts Feb 2025: Solid Sequentially, Slightly Soft YoY 3-18-25

Retail Sales Feb 2025: Before the Storm 3-17-25

Footnotes & Flashbacks: Credit Markets 3-17-25

Footnotes & Flashbacks: State of Yields 3-16-25

Footnotes & Flashbacks: Asset Returns 3-16-25

Mini Market Lookback: Self-Inflicted Vol 3-15-25

Credit Spreads: Pain Arrives, Risk Repricing 3-13-25

Trade: Betty Ford Tariff Wing Open for Business 3-12-25

CPI Feb 2025: Relief Pitcher 3-12-25

JOLTS Jan 2025: Old News, New Risks in the Market 3-11-25

Credit Spreads Join the Party 3-10-25

Mini Market Lookback: Tariffs Dominate, Geopolitics Agitate 3-8-25