The Federal Reserve's latest decision is once again to "wait and see," keeping the federal funds rate unchanged at 4.25%-4.50%. This marks the third time in 2025 that rates have been held steady. Amid the complex signals of inflation data and the potential impact of Trump administration's tariff policies, the Fed is becoming increasingly cautious in its policy path.
Inflation "Uneven," Disrupting Policy Judgement
The newly released April Consumer Price Index (CPI) data has further confused the market. Overall inflation rose by only 2.3% year-on-year, hitting a four-year low, mainly due to a decline in food prices. However, the core CPI (excluding food and energy) remains high at 2.8%, well above the Fed's 2% target, indicating that inflation is "cooling on the surface, stubborn at its core."
Chicago Fed President Goolsbee described the current economic data as "noisy," likening the Fed's efforts to navigating "in the fog," as they strive to find the real economic trajectory. He admitted that under current conditions, it is difficult for businesses, consumers, and even the central bank to make long-term forecasts.
Economic Performance Divergence and Regional Differences Increase Complexity
Recently, San Francisco Fed President Daly visited various states in the western United States and found that economic prosperity varies by region. Las Vegas faces recession concerns due to a decline in tourists, with the tourism industry under significant pressure; in contrast, businesses in Alaska and Utah remain optimistic, and bank lending activities are robust. This "tale of two economies" makes it harder for policymakers to establish a unified response.
Daly noted that, although there are concerns, no widespread economic slowdown has been observed yet. She still believes the overall economy remains "healthy," but emphasizes the need for policy flexibility to respond to potential sudden changes.
Increasing Divisions Among Fed Leaders
Within the Fed, optimism and caution coexist. Daly insists that the labor market is still strong, with inflation expected to continue its downward trend. However, Vice Chair Jefferson has issued more cautious signals. He pointed out that business and household confidence is weakening, and the Trump administration's escalating tariff policies might impede inflation relief and even trigger a secondary price shock.
Jefferson's remarks are viewed as an implicit warning about the future policy path, suggesting that the Fed has not ruled out the possibility of tightening policy again.
Market Awaits Rate Cuts, but "Shoe" Hasn't Dropped
Although the Fed still verbally maintains a cautious stance, the market has already moved ahead. Interest rate futures indicate that the majority of traders bet the Fed will begin a rate cut cycle in September. However, experience shows a discrepancy often exists between market expectations and the Fed's actual actions.
If subsequent data continue to show stubborn inflation, or if the Trump administration's new tariff policies disrupt supply chains, the Fed might be forced to delay easing; conversely, if signs of economic weakness become apparent, a rate cut in September might still materialize.
The Fed Will Continue with Caution Until Out of the Fog
Currently, the Fed faces a highly uncertain policy environment: on one side is the pressure of high core inflation, and on the other is the potential shock from tariff policies. In this "economic data fog," any hasty actions could pose risks.
Therefore, policymakers are more likely to continue choosing to "wait for clear signals," making a policy shift only after seeing the trend of inflation and economic momentum. For investors, patience and defense remain the key strategies to navigate the market at this time.
