Fed To Remain Patient, As Usual

Yields close little changed in FOMC day aftermath. Treasury market volatility was relatively muted ahead of today’s FOMC meeting announcement, with yields down just a few basis points across the curve. Yields then declined ~4 bps in the immediate aftermath of the Fed’s decision but then reversed course shortly thereafter. Chair Powell’s hawkish press conference comments were a large driver of the subsequent climb in yields, as the Fed appears set to continue its patient approach. The 2-year yield closed 1 bp lower at 3.94% while the 10-year closed at 4.39%, unchanged from yesterday. Equities were nearly flat as well, with the S&P 500 down 0.03% and the NASDAQ up 0.13%.

Fed forecasts slower economic growth and higher inflation. As expected, the Fed left rates unchanged for a 4th consecutive meeting today. The revised FOMC statement noted slightly more confidence in the economic outlook, saying, “Uncertainty about the economy outlook has diminished but remains elevated,” and the FOMC now expects both slower growth and higher inflation in the near-term vs. their prior projections. The median core PCE expectation for 2025 rose from 2.8% in March to 3.1%, while real GDP growth is now expected to be 1.4% during the year vs. 1.7% previously. The FOMC’s median rate forecast for 2025 was unchanged at 3.875%, below expectations of a slight increase to 3.94%. However, the median Fed Funds rate forecast for 2026 was 3.625% vs. expectations of no change from 3.375%, and 3.375% over the next 2+ years vs. prior expectations of no change from 3.125%. Despite having more confidence in their outlook, the updated dot plot hinted at growing divisions amongst Fed members over policy positioning during 2025. The median expectation for two rate cuts in 2025 remained unchanged, but seven FOMC members expect zero rate cuts this year vs. four in March. The full FOMC statement with a side-by-side comparison from the last meeting can be read here. 

Chair Powell reiterates that the Fed can exercise patience. Amid elevated economic uncertainty, Chair Powell once again argued that the Fed is “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.” The reluctance to cut policy rates is largely attributable to tariff-driven inflationary concerns, and Powell highlighted that “it takes some time” for those effects to be passed onto the consumer. The Fed has also been able to delay monetary easing due to the strength of the economy, though Powell expects it to weaken “eventually.” He also acknowledged that inflation has shown signs of slowing over the past several months, which could lead to earlier rate cuts if coupled with a more apparent economic slowdown.