Return of 'transitory'

In its policy-setting meeting statement last week, the Federal Reserve said the obvious: uncertainty around the economic outlook has increased. In this environment, the Fed did not change its federal funds rate, and it still expects two cuts this year. In its Summary of Economic Projections, the Fed forecasts lower economic growth in 2025, coupled with higher inflation and unemployment. Chair Jerome Powell indicated that economic data has been solid, but that some recent surveys reflect elevated consumer concern about inflation and their own prospects. Powell discussed the impact of tariffs on growth and consumer outlook, citing the Fed’s attempt to separate the signal from hard data from the noise of other information.

Surprisingly, Powell reintroduced the much-maligned term “transitory” to describe possible impacts of tariff-related inflation. Recall that, to much derision, he used the same term during the post-pandemic inflation run-up. So, on balance, the Fed will wait to see what policies are actually announced and have staying power, and then assess their impact. The Fed is well-positioned to cut rates or hold them stable while waiting for further clarity.

Other economic data was mixed. Weekly jobless claims were essentially unchanged, rising from 220,000 to 223,000, while total retail sales rose 0.2% in February, a smaller gain than forecast. Sales excluding autos, building materials and gasoline were materially stronger than forecasts, rising 1.0% in February.