US | Fed to stay put as it waits for tariff effects to show up in 2Q data

Summary

Amid mixed economic data and the delayed effects of recently imposed tariffs, we expect the Fed to keep the policy rate unchanged this week at its 4.25-4.50% target range; it will likely signal it has room to maintain its policy stance heading into the June meeting.

Key points

• Key points:
• While headline GDP contracted by 0.3% in 1Q25 driven by surging imports, underlying demand remained solid, with consumption and investment proving resilient.
• Hiring remains robust across cyclical sectors, and layoffs are limited—even as federal employment shrinks and outlook risks persist.
• Despite softer price data (core PCE inflation rose by just 0.03% in March) tariffs and rising expectations suggest the Fed will tread cautiously on any dovish turn.
• Treasury yields and widening spreads reflect investor uncertainty, while Fed officials emphasize caution amid persistent inflation threats.
• With economic activity still solid and tariffs set to push up inflation, the Fed is expected to extend its pause while awaiting greater clarity.

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