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) raised interest rates by 0.25% at the May FOMC Meeting earlier this month. It was the tenth straight FOMC meeting that interest rates were increased by the Fed. Rates were increased by 5% since March 2022 from near 0% to a range of 5.00% to 5.25%. The good news is that we may have seen the last rate increase of this cycle. The Fed removed guidance for future rate hikes in their May statement and Fed Chair Powell wouldn’t commit to more hikes during the post-FOMC Meeting press conference. The Fed will remain data dependent. There is a chance that future rate hikes could arise if inflation re-accelerates or doesn’t ease as quickly as the Fed would like. As of now, the current Fed funds futures odds are overwhelming in favor of a pause in rate hikes in June (85% odds as of May 15). The higher probability scenario is a pause through the summer months as the Fed assesses the impact from the long and variable lag of hikes this cycle, plus the impact on the economy from tighter lending standards resulting from banking-sector turmoil.

Slowing the pace of inflation has been the main priority of the Fed since this rate hike cycle began. CPI inflation peaked at 9.1% year-over-year last June but has slowed to 4.9% as of April. Inflation remains stubbornly above the Fed’s long-term target of 2.0%, but the trend points to a continuation of easing inflation. The labor market has shown resiliency during this rate hike cycle, though signs of cooling have emerged. The pace of job growth is slowing but remains above pre-pandemic trends. The number of job openings is declining quickly, and initial jobless claims have trended higher since late January. With that said, the unemployment rate matched a 54-year low of 3.4% in April. A cooling labor market puts less upward pressure on inflation.

We are moving the Fed-O-Meter dial slightly to left. The Fed is likely to hit pause on rate hikes for now. Inflation is slowing, the pace of labor growth is easing, and the lagged effect from the rate hikes implemented thus far will likely impact the outlook for the economy.