What To Look For From The Fed's May Meeting
US Federal Reserve Chairman Jerome Powell gestures as he speaks at a press conference after the ... More Monetary Policy Committee meeting in Washington, DC, on December 18, 2024. The US Federal Reserve cut interest rates by a quarter point December 18 and signaled a slower pace of cuts ahead, amid uncertainty about inflation and US President-elect Donald Trump's economic plans. Policymakers voted 11-to-1 to lower the central bank's key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement. They also penciled in just two quarter-point rate cuts for next year, and sharply hiked their inflation outlook for 2025. (Photo by ANDREW CABALLERO-REYNOLDS / AFP) (Photo by ANDREW CABALLERO-REYNOLDS/AFP via Getty Images)
The Federal Open Market Committee will next announce interest rates on May 7 at 2 p.m. Eastern Time. Fixed income markets firmly expect short-term interest rates to remain in their current band of 4.25% to 4.5%.
However, it is also likely that interest rates could then be cut at the subsequent FOMC decision on June 18, so fixed income markets will be watching for hints of that. If so, that may come either through the statement or the press conference. The current expectation is for interest rates to move moderately lower in 2025. However, the economy's reaction to tariffs creates some uncertainty for monetary policy.
FOMC policymakers have said that though rates will likely move lower, patience is required. That's because the jobs market has generally remained robust on recent reports and to the extent the economy remains strong the FOMC is under limited pressure to act. For example Fed Chair Jerome Powell said on April 16, 'Overall, the labor market appears to be in solid condition and broadly in balance.'
Inflation remains above the FOMC's target. For example the Personal Consumption Expenditures price index for the 12 months to March 2025 rose 2.6% excluding food and energy prices. Somewhat elevated inflation compared to the FOMC's 2% annual target is one reason the FOMC are not rushing to cut interest rates. Policymakers also appear more inclined to react to upcoming economic data rather than predict it based on recent statements from officials.
In addition, economic uncertainty is high. That's because the economic impact of tariffs has yet to be fully captured in the data and because tariff rates and trade policy continue to evolve. For example, Powell said regarding government policies that. 'Those policies are still evolving, and their effects on the economy remain highly uncertain. As we learn more, we will continue to update our assessment.' That statement was part of the same April 16 speech as referenced above.
Furthermore, the U.S. economy shrank in the first quarter according to the advance estimate U.S. Bureau of Economic Analysis as reported on April 30. Though that decline was driven by significant swings in imports, which were very likely in response to tariffs. The early growth estimate may be subject to revision.
It is unclear how much the FOMC will be able to signal at the May meeting because they are awaiting further economic data on the impact of tariffs. Although declining growth in the first quarter is not encouraging.
President Trump has criticized Powell for not cutting rates more proactively, most recently at a rally on April 29 according to reporting by The Hill.
However, the President appears to have moved back from suggestions he might try to actually remove the Fed Chair, whose term ends in May 2026. Powell has also stated in November 2024 that it is not lawful for the President to remove him.
A change in interest rates on May would come as a surprise to markets, but a rate cut at the subsequent meeting in June is viewed as probable. Therefore, markets expect that either the FOMC's statement or Powell's press conference on May 7 may contain some suggestion that interest rates could be cut in the very near term. That's because the FOMC often manages the expectations of markets leading up to a rate cut.
In addition, markets anticipate that short-term interest rates will likely end 2025 around the mid 3% range. However, updates to that assessment may be just as dependent on incoming economic data during a period of elevated uncertainty as what FOMC officials say on May 7 and subsequently.
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