Publications

The hurdle for additional easing is now considerably higher than it was earlier this year, while the possibility of future rate hikes can no longer be dismissed if inflation fails to resume its path toward target.

The FOMC will most likely keep the fed funds target range unchanged at 3.50-3.75% and shift to a more two-sided approach to future policy guidance. The case for maintaining an easing bias has weakened materially as labor market downside risks appear to have diminished, while inflation progress has become less convincing.

Three voting regional presidents, while supporting the decision to hold rates steady today, did not back the statement’s easing bias, signaling a growing view within the Committee that the scope to resume rate cuts this year is becoming increasingly limited.

The Fed approaches this meeting in a somewhat more benign geopolitical environment than it did in March, but still-sticky core PCE inflation, alongside March’s upside surprises in retail sales and nonfarm payrolls, may push the Committee toward a somewhat more hawkish tone at the margin.

For a second straight meeting, the Fed held rates steady last week at a 3.50-3.75% target range, flagging renewed inflation risks tied to the Middle East conflict—now priced in by markets through higher medium- and long-term yields.

A sooner resumption of easing would likely require either a more decisive weakening in the labor market or a faster-than-expected easing of tariff-driven goods inflation, potentially reinforced by a swift resolution of the current conflict in Iran.

Treasury yields declined following a softer-than-expected January headline CPI reading, which continued to indicate limited tariff pass-through. However, the inflation report also signaled that disinflation momentum in cyclical components has somewhat slowed.