Fed Watch - Powell: 'Maybe I'll stay where I am'

In its projections, the median estimate for GDP growth in 2025 dropped to 1.7% from 2.1% in December. Headline and core PCE inflation moved up to 2.7% and 2.8%, from 2.5% in December. Unemployment at year end edged up to 4.4% from 4.3%. The updated forecasts clearly reflect the impact of tariffs. The statement revealed that uncertainty around the outlook has increased. The January press release already said that the economic outlook was uncertain; the change of language to increased is significant.

The dot plot revision is mild given the above. While the median member still put two cuts for this year, there were four members who see no more cuts, another four who see one more cut, and only two that saw three cuts. The remaining nine pencilled in two cuts. In December, only four members thought there would be less than two cuts in 2025. This slight hawkish tilt in the dot plot is mostly in line with our expectations of a Fed worried about inflation expectations.

In the press conference, Powell explained why the median dot plot had not changed. An increase in inflation and a decrease in growth 'cancel each other out.' He raised the additional factor that the highly uncertain environment creates inertia: 'maybe I'll stay where I am.' He acknowledged the difficulty in assessing future developments in the economy, and separating noise from signal. They see initial effects of the Trump administration's policy in survey data, and Powell hinted that a resurgence in goods inflation in January and February is likely linked, directly or indirectly, to tariffs. The most striking recent survey reading is a sudden rise in the 5-year inflation expectation from the University of Michigan Survey, which Powell referred to as an outlier amongst other surveys and market-based measures of inflation expectations. Whilst reiterating the importance of anchored inflation expectations, he noted they saw no evidence de-anchoring. Furthermore, as for the long-term inflationary impact of tariffs, he noted that 'transitory is the base case,' similar to the previous round of tariffs, but in contrast with the pandemic inflationary bout.

In our preview we noted that we expected Powell to push back against the more aggressive easing priced by markets. By and large he did by providing a relatively hawkish narrative. He explained that the hard data remains solid. Looking ahead, he noted that inflation is expected to remain flat for the rest of the year, recession probabilities are still low, and that the link between consumer surveys and actual economic activity is weak, downplaying concerns. The Committee will be looking for signs of weakness, but 'the right thing to do now, is to wait for clarity' from the policies of this 'government by tweet,' as one journalist put it. This overall narrative is broadly consistent with our base case of the Fed holding rates steady indefinitely.