The Federal Reserve remained on pause with respect to rate cuts at the conclusion of its May meeting, maintaining the federal funds rate in the 4.25% to 4.5% range, according to analysis from the . Characterizing current market conditions, the central bank noted that the 鈥渦nemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.鈥� However, the Fed noted that 鈥渋nflation remains somewhat elevated.鈥�
The statement acknowledged the weak first quarter GDP report via a reference to 鈥渟wings in net exports have affected data鈥� but otherwise the economy continues to expand at a 鈥渟olid pace.鈥� The Fed also reiterated its commitment to maintain maximum employment and bring inflation back to its 2% target rate.
With respect to monetary policy, the Fed noted that uncertainty for the U.S. economy has increased. Mindful of its dual mandate (price stability and maximum employment), the Fed noted that the 鈥渞isks of higher unemployment and higher inflation have risen.鈥� This statement reflects the complex situation the Fed currently faces, with risks to both sides of its policy mandate increasing.
While todays statement does not explicitly reference tariff policy, the debate over tariffs is an obvious candidate for the source of these rising risks that would harm the labor market and raise prices. Indeed, Chair Powell referenced industry reports of tariff risks in his press conference. Many economists, who as a profession dislike tariffs, would argue that the Fed would likely move further on normalizing monetary policy and reducing rates, if not for the risks of future tariff policy.
In the meantime, as Chair Powell noted, otherwise solid economic conditions leave the Fed with moderately restrictive policy and 鈥渋n a good place to wait and see鈥� with respect to future policy.
Today鈥檚 statement noted that the Federal Open Market Committee 鈥渨ill carefully assess incoming data, the evolving outlook, and the balance of risks.鈥� In particular, the Fed will review 鈥渞eadings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.鈥�
While the list of data sources the Fed is watching seems like everything but the kitchen sink, the Fed should be sure to watch sinks, windows, lighting fixtures, and other building material pricing and availability to gauge future economic and inflation conditions. Shelter inflation remains a leading source of ongoing elevated inflation. And shelter inflation can only be reduced by building more attainable housing.
