Fed Recap:

by Eric Criscuolo - Market Strategist

To the surprise of no one the Federal Reserve left rates unchanged and remains very much in wait-and-see mode. Despite an incredibly uncertain backdrop, the economy is in a good place and the Fed is well positioned to respond to potential developments, according to Chairman Powell. The major takeaway could be that we need to find a new way to say “uncertainty”.

The Fed statement kicked things off by calling out in the first sentence the substantial impact of net exports (or more specifically the surge in imports from tariff front-running): “Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace”.  That statement also underscored that the Fed still sees the economy in good shape, a topic that Powell hit on over, and over, and over again in the press conference.

The other change to the statement was the additional commentary on increased risks and uncertainties, though this was not really surprising either. The word “further” was added to the end of the sentence, “Uncertainty about the economic outlook has increased” and the statement “The Committee is attentive to the risks to both sides of its dual mandate” was expanded to include, “and judges that the risks of higher unemployment and higher inflation have risen.”  This is all very much in line with Chairman Powell’s most recent commentary on April 16.

The S&P 500's immediate response was to fall ~30 points on the statement’s release, which could have been due to the added statement about greater uncertainty and risks, as well as a lack of a defined path for rate cuts (by highlighting the impact of imports on negative growth this quarter making an  “excuse”).  However 2yr and 10yr yields fell about 3-4bp and the US Dollar Index ticked lower as well. Comments from President Trump muddied the waters when he spoke with reporters right before the Fed announcement and said he was not open to pulling back on China’s 145% tariffs, temporarily sending the S&P lower before Powell even stepped to the podium.   

Beyond uncertainty, Powell was adamant about two things: the economy and Fed policy are in good shape, and the Fed will be patient. The Fed will be patient in order to better assess both the structure and impact of the administration’s policy that, framing it in my kid’s perspective, throws tantrums and refuses to stay still.  Powell noted that the cost of waiting in order to see further are fairly low right now. The inflation-employment trade-off is the key issue. It would be a “complicated and challenging judgement,” but if the dual mandate is in tension, the Fed needs to assess how far inflation and employment are from goal, how fast they are changing and how quickly they can make bring them back to goal. The Fed has been adament that inflation expectations need to anchored.  While survey-based measures of uncertainty have climbed to high levels (i.e. Univ of Michigan, second chart below), market-based measures are more grounded (first chart below), a notion that Fed Governor Waller discussed on April 14.     

While acknowledging that the growth and inflation risks have increased, Powell was also careful to underscore that these risks have not yet manifested themselves. Powell got into details about the GDP number and how underneath the import data, underlying metrics like private domestic final purchase (PDFP), which exclude net exports, inventory investment and government spending, growth a solid 3% in Q1.  He stayed more on the top-level to highlight the solid condition of the labor market.  He also noted the discrepancy in soft versus hard data we have routinely written about.  

The Q&A session kicked off with a question on how the Fed would triage its dual mandate (employment and inflation) and Powell’s answer was that it was too early to say how things shake out, a theme he pile-drove into ground. This was not only reflective on how tariffs will affect inflation and growth/employment, but even before that, what the actually trade policy will be.  If felt like the rest of the Q&A was mostly trying to find a new way to ask this question.

The probabilities for a June cut fell from 30% yesterday to 20% today and are well below expectations from a week ago.

From their lows before the start of the press conference (~5580), the S&P climbed 0.7% (~5620), fell back to ~5595 and then and then quickly climbed again to ~5625. Another step backwards around 3:30pm was met with another sharp move higher, this time due to reports that President Trump was rescinding an AI diffusion rule that restricted export of US technology. The rule is expected to be replaced with another, hopefully simpler one but whose contents are unknown as of now.

The S&P jumped about 1% and eventually ended the day up 0.4% after being down 0.5% at the lows, essentially finishing near the levels it was at heading into the Fed decision. The action pushed the ICE Semiconductor Index to close up 1% and the FANG+ index 2% as Tech and Comm Services overcame the Alphabet and Apple weakness from the antitrust trial. Despite the gyrations the 2yr was essentially unchanged at 3.79% and the 10-year down 2bp to 4.28%.  

Tomorrow will bring weekly jobless claims, the NY Fed Consumer Expectations Survey and more earnings- shipping giant Maersk reports in what could be an important read on the economy and trade impacts. 

On Friday, the solo dance today will expand to a Soul Train event with at least eight Fed speakers getting freed from the press blackout to discuss all of this.

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