Fed Holds Fire as Powell Waits for Clarity on Inflation, Jobs, and Tariffs

Federal Reserve Chair Jerome Powell delivered a cautious and largely familiar message in his June 2025 post-meeting press conference, emphasizing that monetary policy remains in a "good place" and that the central bank is well-positioned to wait for more data before making its next move. Despite some market volatility around the release, the press conference was widely viewed as a non-event. Equities remained near pre-Fed levels, while the U.S. dollar saw a notable rally of nearly 1% following the decision.

Powell reiterated that the Fed continues to face a complex balancing act between its dual mandate goals of price stability and full employment. He acknowledged that recent inflation readings have moderated, particularly in core services, but warned that tariff-related price pressures are beginning to emerge and may intensify over the summer. The Chair made clear that the Fed cannot assume these pressures will be transitory and must instead guard against a one-time price jump becoming a more persistent inflation problem.

"We are beginning to see some effects [of tariffs], and we expect to see more", Powell said, pointing to recent price increases in categories like personal computers and audiovisual equipment. He added that the inflationary impact of tariffs remains highly uncertain, dependent on both their ultimate level and duration. In this context, Powell reaffirmed that the Fed's current stance is only "modestly restrictive" not highly so, and is appropriate for a wait-and-see approach.

On growth, Powell noted that while Q1 GDP decelerated due to volatile net exports, underlying domestic demand (measured by final domestic purchases) remained solid at 2.5%. Business investment has rebounded from Q4 weakness, although consumer spending has cooled modestly. Still, surveys show persistent pessimism among households and firms, reflecting trade policy concerns and geopolitical uncertainties, particularly tensions in the Middle East.

Asked about the impact of Israel-Iran hostilities and the July 9 tariff deadline, Powell acknowledged that Middle East turmoil could push energy prices higher, but downplayed the likelihood of long-lasting inflation shocks. He reminded reporters that unlike the 1970s, the U.S. economy is far less dependent on foreign oil, and energy price spikes tend to fade.

As for the economic projections, the June Summary of Economic Projections (SEP) showed only minimal changes: the 2025 median federal funds rate remained at 3.9%, though the distribution suggests a more divided committee. Powell noted that the divergence in 2025 rate forecasts stems from differences in inflation outlooks and risk tolerance. "No one holds these rate paths with a great deal of conviction", he said, adding that more clarity will emerge over the summer.

Powell also offered insight into the ongoing framework review. The Fed expects to complete updates to its policy framework by the end of summer, while communications practices, including potential changes to the SEP, will be discussed more deeply in the fall. He stressed any changes would need broad support and must improve clarity without adding unnecessary complexity.

On labor markets, Powell maintained that conditions remain broadly healthy. Unemployment is steady at 4.2%, and participation, job creation, and wages remain constructive. He acknowledged signs of slow cooling but said nothing currently indicates a troubling shift. On housing, Powell noted that structural supply issues and elevated mortgage rates remain headwinds, but reiterated the Fed’s best contribution to housing is restoring price stability and a strong labor market.

The Fed Chair concluded by reinforcing the forward-looking nature of monetary policy. While backward-looking data might suggest a move to neutral rates, the expected rise in inflation necessitates patience. "We think our current stance of monetary policy is in a good place", he repeated, signaling little urgency to cut.

Looking ahead, Chair Powell will testify before Congress on June 25-26. The hearings are expected to offer a more detailed venue for Powell to expand on the Fed's views and defend its strategy in what is likely to be a bipartisan grilling. Investors will be watching closely to see whether Powell offers any further clarity on the evolving rate path or the impact of tariffs, geopolitics, and fiscal policy on the Fed's outlook.

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