At 2 p.m., the Federal Open Market Committee of the Federal Reserve Board will release its statement on monetary policy. The committee will keep the federal funds target range unchanged at 3.50%–3.75%. The fed funds rate is a key interest rate tool of the committee.
Further, the committee will continue to signal that additional interest rate cuts will be limited to at most one additional cut this year. It will also emphasize that it requires “greater confidence” that inflation is moving toward the Federal Reserve’s 2% inflation target. The FOMC will state that it is watching closely how the United States economy reacts to its fourth supply shock in five years. The economy has experienced the effects of the reopening following the COVID-19 pandemic, Russia’s invasion of Ukraine, the tariffs of President Donald Trump, and now the oil spike caused by the Iran war. The committee is concerned about the cumulative effect of these supply shocks, which have caused inflation to remain well above the 2% target.
Two Federal Reserve governors who were previously inclined to lower rates are now more cautious about the inflation outlook. Governor Christopher Waller of the St. Louis Federal Reserve said, “We have to be careful about these one-off shocks. Expectations matter, and at some point we may have to respond” with higher rates. New York Federal Reserve President John Williams told the media on April 16, “If anything, inflation is moving up.”
The committee will be paying close attention to wage inflation. For now, wages are well behaved. If wages do not chase prices, then inflation cannot become embedded in the economy. High oil and gasoline prices act as a tax on consumption. If wage growth remains steady, households will have no choice but to reduce consumption of goods and services as they pay more for energy. Wage inflation is the key metric.
Of course, the committee will also be watching how the energy spike affects the labor market. Will energy-intensive businesses begin to reduce employment in the face of higher costs? The committee is keenly aware of its dual mandate: low inflation and full employment. For now, the committee will take a cautious “wait-and-see” approach.
There are also important political currents surrounding the meeting. This will probably be Jerome Powell’s last meeting as chairman. Now that the Department of Justice has dropped its investigation of Powell over the renovations to the Federal Reserve headquarters, the Senate will likely move quickly to confirm Kevin Warsh as his successor.
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However, Powell’s term as a Federal Reserve governor does not end until January 2028. Traditionally, Fed chairs have resigned their board seats when their terms as chairman end. Will Powell remain as a governor to protect the institution from political meddling by the president?
At the post-meeting press conference, the media will be listening carefully to what Powell says about his future plans. The tension between Powell and the president may continue for another two years.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for over 30 years. Now he writes a daily note on markets, economics, politics, and social issues.