In a Nutshell:  The decline in core inflation is due to “transient” factors. – Fed Chair Jerome Powell

Decision: Fed funds rate target range remains at 2.25% to 2.50%.

With the president ramping up pressure on the Fed to lower rates, today’s FOMC statement and press conference took on even greater importance than usual.  Would the Fed signal that its next move would be down?  Or, would it stand its ground?  Well, the answer depends upon whether you looked at the statement issued after the meeting or listened to the Fed Chair’s comments at the press conference. 

The statement seemed to lean toward a possible rate cut.  Indeed, the members noted that “… overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.”  That seemed to signal that the Fed was worried about inflation decelerating and the logical conclusion was that it was biased toward the next move being an easing.

But then there was the press conference.  Multiple times, Fed Chair Powell stated that the decline in inflation was likely due to transient or transitory factors.  That insistence on playing down the easing in inflationary pressures makes it clear that at least for now, the Fed is very comfortable with its wait and see data dependency approach.  Thus, there is little reason to believe the Fed will be cutting rates soon or even if the next move is down. 

The markets got whipsawed by the Fed’s poor communication of its view on inflation.  First they reacted as if rates were going down and then they backed it all out and even some more. 

The Fed is walking a difficult line given the president’s insistence on trying to politicize monetary policy.  Nothing less than the credibility of the Fed is at stake, and I am not overstating that.  Mr. Powell blew it when he caved to the markets in December.  The economy was never as bad as investors thought yet he behaved as if it was.  So, we know the markets can push him around.  If the president can also bully him, the concept of an independent Fed will be damaged. 

For now, Chair Powell has regained the high ground.  But he faces real risks. He make clear in an answer to a question that political issues are not part of the policy discussions, but every member knows what is going on. It could be difficult to cut rates without strong evidence that either the economy is faltering or inflation is collapsing. If the Fed waits too long to do so because it doesn’t want to appear to be appeasing the president, the economy would suffer. To the extent that is now a possibility, harm has already been done to the Fed.

(The next FOMC meeting is June 18-19, 2019.)