Paul’s not a doctor and no, he doesn’t play one on TV. But this week, he takes us on a tour inside the murky depths of Jerome Powell’s head. Specifically, what sorts of things the Chairman of the Federal Reserve looks at and weighs before making any moves to the Interest Rate. Paul touches on Labor Markets, Consumer Spending, Inflation trends and shifts and more. It’s a balancing act eliciting “Ooohs and Aaahs” from economists around the world, because the moves Jerome makes affect the Global Markets.
Give it a listen and pass it on, because the more we all know about how our money works, the better financial decisions we can make together.
Thanks for joining us. Have a GREAT weekend!
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Hello, I’m Paul Tichy with Stiles Financial, and welcome to this week’s Financial Flash.
Today, I’ll discuss one of the most consequential questions facing the U.S. economy right now: What will the Federal Reserve do with interest rates in the coming months?
The FOMC meeting last week came and went with few headlines.
The Committee did not make any interest rate adjustments, as expected.
In their press release they noted that the “risks of higher unemployment and higher inflation have risen.”
During the press conference, Jerome Powell reiterated that the committee is data dependent and not in a rush to make a move.
We’re at a moment of genuine uncertainty — and the Fed itself is caught in a tug-of-war between strong economic data and stubborn inflation – or at least the threat of oncoming inflation. The dilemma over the Fed Funds Rate is more than just a headline — it’s a window into a wider standoff between growth, inflation, and the expectations of financial markets.
Let’s break this down.
Right now, the federal funds rate is sitting at a range of 4.25% to 4.50%. This level was reached after a historic tightening campaign that began in March of 2022, as the Fed tried to tame post-COVID inflation. The Fed then reduced the Fed Funds Rate by 100 basis points over three meetings last Fall.
And now we sit stagnant since December 2024.
So, where do we go from here?
If we look at the Fed Funds Futures Market, particularly the CME FedWatch Tool, it gives us a market-implied probability estimate of where rates are headed. Just a few weeks ago, markets were pricing in three or even four rate cuts by the end of 2025 — with the first expected to come as early as June or July. But that picture has changed.
As of this week, the futures market has dialed back those expectations sharply. Now, it’s showing less than a 50% chance of even one cut until the September meeting. And for October and December, there is a probability of another single 25-basis-point cut that is still above 60%, but its falling. In short: confidence in rate cuts is weakening.
So why the shift?
The answer lies in the data.
The Fed is trying to thread a very tight needle — and they’re watching a wide array of economic indicators to guide them. Let’s run through the ones they care about most.
First, inflation. The Fed’s preferred gauge — the Core PCE, or Personal Consumption Expenditures index — has been sticky. March’s Core PCE rose 2.7% year-over-year. That’s down from the highs of 2022, but it’s been essentially flat for several months. And the more widely known CPI, or Consumer Price Index, came in at 2.4% in March. While these are not the kind of numbers that gives the Fed reason to keep rates high, there is still the lingering concern of upward pricing pressure from impending tariffs.
Second, the labor market. It’s still strong. Unemployment is holding near historic lows at 4.2%, and wage growth is stable. Nonfarm payrolls actually well exceeded expectations when reported a couple of weeks ago. So from the Fed’s perspective, this shows the economy hasn’t slowed enough to drive inflation meaningfully lower.
Third, consumer spending and GDP growth. Despite higher borrowing costs, the consumer hasn’t cracked. The Q1 GDP number came in soft – down 0.3%, but spending held up. Retail sales in March were stronger than expected. That’s a sign the economy still has momentum — which complicates the Fed’s job.
So, here’s the dilemma:
On the one hand, the Fed knows it risks keeping the monetary policy too tight. Keeping rates too high for too long could eventually break something — whether in credit markets, small business lending, or consumer spending. This is where the doves on the committee are warning that the effects of past hikes may still be working their way through the economy.
But on the other hand, cutting too soon — especially if inflation reaccelerates — would undermine the Fed’s credibility. And that’s a risk Chair Powell is clearly not willing to take just yet.
So for now, we’re in a kind of policy limbo.
The Fed is data-dependent — and the data is conflicting. The bond market is signaling caution. Equity markets have largely been resilient, though a bit more volatile lately. And the futures market is essentially telling us this: one cut, maybe — but only if inflation eases more clearly, or if growth deteriorates faster than expected.
So what should we watch next?
Keep your eye on the next CPI and Core PCE prints. The Fed won’t move until they see clear, consistent progress toward their 2% inflation goal. Also pay close attention to jobless claims and credit conditions — those could be early warning signs if the economy starts to slow more dramatically. But as pointed out earlier, the Fed doesn’t want to wait too long on evidence of inflation slowing so as not to end up – like China is right now – facing inflation so low it starts to become deflationary.
In short, the Fed’s next move is not a matter of timing anymore — it’s a matter of evidence.
Until that evidence builds decisively in one direction, the Fed will likely remain exactly where it is: holding rates steady, and holding its breath.
