Economics
Here’s what to expect when the Fed wraps up its meeting Wednesday
Federal Reserve Chairman Jerome Powell prepares to testify before the Senate Banking, Housing and Urban Affairs Committee on March, 7 2024.
Kent Nishimura | Getty Images News | Getty Images
Faced with stubborn inflation that has raised concerns about where policy is headed, the Federal Reserve has been ensnared in a holding pattern that likely will be reflected when it closes its meeting Wednesday.
Markets are anticipating a near-zero chance that the Federal Open Market Committee, the central bank’s policy-setting arm, will announce any change to interest rates. That will keep the Fed’s key overnight borrowing rate in a range targeted between 5.25%-5.5% for what could be months — or even longer.
Recent commentary from policymakers and on Wall Street indicates there’s not much else the committee can do at this point.
“Pretty much everybody on the FOMC is talking from the same script right now,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. “With maybe one or two exceptions, policymakers pretty universally agree that the last few months of inflation data are too warm to justify action in the near term. But they’re still hopeful that they will be in a position to cut rates later.”
The only piece of news likely to come out of the meeting itself is an announcement that the Fed soon will reduce the level at which it is running down the bond holdings on its balance sheet before bringing an end to a process known as “quantitative tightening” altogether.
Outside of that, the focus will be on rates and the central bank’s unwillingness to budge for now.
Lack of confidence
Officials from Chair Jerome Powell on down through the regional Fed bank presidents have said they don’t expect to start cutting rates until they are more confident that inflation is headed in the right direction and back toward the 2% annual goal.
Powell surprised markets two weeks ago with tough talk on how committed he and his colleagues are to achieve that mandate.
“We’ve said at the FOMC that we’ll need greater confidence that inflation is moving sustainably towards 2% before [it will be] appropriate to ease policy,” he said at a central bank conference. “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.”
Markets actually have held up pretty well since Powell made those comments on April 16, though stocks sold off Tuesday ahead of the meeting. The Dow Jones Industrial Average had even gained 1% over that period with investors seemingly willing to live with the prospect of a higher-for-longer rate climate.
But there’s always the specter that an unknown could come up.
That likely won’t happen during the business portion of the FOMC meeting, as most observers think the committee statement will show little or no change from March. Yet Powell has been known to surprise markets in the past, and his comments at the press conference will be scrutinized for just how hawkish of a view committee members hold.
“I doubt we’re going to get something that really surprises market pricing,” LeBas said. Powell’s comments “were pretty clear that we have not yet reached the threshold for significant further evidence of cooling inflation,” he said.
There’s been plenty of data lately to back up that position.
The personal consumption expenditures price index released last week showed inflation running at a 2.7% annual rate when including all items, or 2.8% for the all-important core measure that excludes food and energy. Fed officials prefer the Commerce Department index as a better inflation measure and focus more on core as a better indicator of long-term trends.
Additional evidence came Tuesday when the Labor Department said its employment cost index rose 1.2% in the first quarter, a 0.3 percentage point gain from the previous period and ahead of the Wall Street outlook for 1%.
None of those numbers are consistent with the Fed’s goal and likely will push Powell to exercise caution about where policy goes from here, with an emphasis on the fading outlook for rate cuts anytime soon.
Down to one cut, hopes for more
Futures market pricing sees only about a 50% chance of a rate cut as early as September and is now anticipating just one quarter-percentage-point reduction by the end of 2024, according to the CME Group’s much-viewed FedWatch measure.
Some on Wall Street, though, are still hopeful that inflation data will show progress and allow the central bank to cut.
“While the recent upside inflation surprise has narrowed the path for the FOMC to cut this year, we expect upcoming inflation reports to be softer and still expect cuts in July and November, though even moderate upside surprises could delay cuts further,” Goldman Sachs economist David Mericle said in a note.
The Wall Street bank’s economists are preparing for the possibility that the Fed could be on hold for longer, particularly if inflation continues to surprise to the upside. In addition, they said the prospect of higher tariffs following the presidential election — favored by former President Donald Trump, the Republican nominee — could be inflationary.
On top of that, Goldman is part of a growing chorus on the Street that thinks the Fed’s March projection for the long-run “neutral” interest rate — neither stimulative nor restrictive — is too low at 2.6%.
However, the firm also doesn’t see rate hikes coming.
“We continue to think that rate hikes are quite unlikely because there are no signs of genuine reheating at the moment, and the funds rate is already quite elevated,” Mericle said. “It would probably take either a serious global supply shock or very inflationary policy shocks for rate hikes to become realistic again.”
Unwinding QT
One bit of news the Fed likely will make at the meeting would be an announcement regarding the balance sheet.
The central bank has been allowing up to $95 billion in maturing Treasurys and mortgage-backed securities to roll off each month, rather than reinvesting the proceeds. The operation has reduced the Fed’s total holdings by about $1.5 trillion.
Officials at their March 19-20 meeting discussed cutting the amount of runoff “by roughly half from the recent pace,” according to minutes from the session.
As it reduces the holdings, bank reserves parked at the Fed theoretically would decline as institutions put their money elsewhere. However, a dearth of Treasury bill issuance this year has caused the reserves level to rise by about $500 billion since the beginning of the year to $3.3 trillion as banks park their money with the Fed. If the reserves level doesn’t drop, it might push policymakers into carrying out QT for longer.
Economics
Trump will ‘buckle under pressure’ if Europe bands together over tariffs: German economy minister
U.S. President Donald Trump speaks during a “Make America Wealthy Again” trade announcement event in the Rose Garden at the White House on April 2, 2025 in Washington, DC.
Chip Somodevilla | Getty Images
Markets have turned their sights on how U.S. President Donald Trump’s administration arrived at the figures behind the sweeping tariffs on U.S. imports declared Wednesday, which sent global financial markets tumbling and sparked concerns worldwide.
Trump and the White House shared a series of charts on social media detailing the tariff rates they say other countries impose on the U.S. Those purported rates include the countries’ “Currency Manipulation and Trade Barriers.”
An adjacent column shows the new U.S. tariff rates on each country, as well as the European Union.
Chart of reciprocal tariffs.
Courtesy: Donald Trump via Truth Social
Those rates are, in most cases, roughly half of what the Trump administration claims each country has “charged” the U.S. CNBC could not independently verify the U.S. administration’s data on these duties.
It didn’t take long for market observers to try and reverse engineer the formula — to confusing results. Many, including journalist and author James Surowiecki, said the U.S. appeared to have divided the trade deficit by imports from a given country to arrive at tariff rates for individual countries.
Such methodology doesn’t necessarily align with the conventional approach to calculate tariffs and would imply the U.S. would have only looked at the trade deficit in goods and ignored trade in services.
For instance, the U.S. claims that China charges a tariff of 67%. The U.S. ran a deficit of $295.4 billion with China in 2024, while imported goods were worth $438.9 billion, according to official data. When you divide $295.4 billion by $438.9 billion, the result is 67%! The same math checks out for Vietnam.
“The formula is about trade imbalances with the U.S. rather than reciprocal tariffs in the sense of tariff level or non-tariff level distortions. This makes it very difficult for Asian, particularly the poorer Asian countries, to meet US demand to reduce tariffs in the short-term as the benchmark is buying more American goods than they export to the U.S., ” according to Trinh Nguyen, senior economist of emerging Asia at Natixis.
“Given that U.S. goods are much more expensive, and the purchasing power is lower for countries targeted with the highest levels of tariffs, such option is not optimal. Vietnam, for example, stands out in having the 4th largest trade surplus with the U.S., and has already lowered tariffs versus the U.S. ahead of tariff announcement without any reprieve,” Nguyen said.
The U.S. also appeared to have applied a 10% levy for regions where it is running a trade surplus.
The Office of the U.S. Trade Representative laid out its approach on its website, which appeared somewhat similar to what cyber sleuths had already figured out, barring a few differences.
The U.S.T.R. also included estimates for the elasticity of imports to import prices—in other words, how sensitive demand for foreign goods is to prices—and the passthrough of higher tariffs into higher prices of imported goods.
“While individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero. If trade deficits are persistent because of tariff and non-tariff policies and fundamentals, then the tariff rate consistent with offsetting these policies and fundamentals is reciprocal and fair,” the website reads.
This screenshot of the U.S.T.R. webpage shows the methodology and formula that was used in greater detail:
A screenshot from the website of the Office of the United States Trade Representative.
Some analysts acknowledged that the U.S. government’s methodology could give it more wiggle room to reach an agreement.
“All I can say is that the opaqueness surrounding the tariff numbers may add some flexibility in making deals, but it could come at a cost to US credibility,” according to Rob Subbaraman, head of global macro research at Nomura.
— CNBC’s Kevin Breuninger contributed to this piece.
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