The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
The Federal Reserve (Fed) held rates steady for a second consecutive FOMC meeting in March and signaled the potential for an extended pause. The updated Summary of Economic Projections continues to show a median expectation for one rate cut by year-end, but Fed officials are keeping a close eye on rising inflation pressures. Rising uncertainty stemming from the Iran war is further complicating the Fed’s outlook. Inflation projections for 2026 were revised higher, and futures markets have reduced rate cut expectations for both this year and next.
Recent data highlights the difficulties for the Fed balancing their labor market and inflation mandates. The labor market has decelerated over the past year, with job declines in five of the last nine months, including a loss of 92,000 jobs in February. Slowing labor supply growth, driven by reduced immigration and baby boomers hitting retirement age, has contributed to weaker hiring, and a broad range of industries are now experiencing flat or declining job growth. The unemployment rate currently sits at 4.4%, but with hiring already subdued, any pickup in layoffs could result in a more meaningful rise in unemployment. Progress on inflation has been mixed. Core CPI inflation eased to a five-year low of 2.46% in February. However, rising energy prices driven by the Iran war are likely to push headline inflation higher in the near term. While energy prices do not directly affect core inflation measures (they exclude food and energy categories), higher oil prices can indirectly pressure a wide range of consumer categories. Meanwhile, the Fed’s preferred inflation gauge, the core PCE price index, has moved higher in recent months and is above 3% year-over-year.
We expect no near-term changes to Fed policy. Until more progress is made on inflation, Fed officials are likely to remain cautious about cutting rates absent severe deterioration in the labor market. At this time, we do not anticipate any Fed action on rates and will maintain the Fed-O-Meter at its current position.
