Fed Meeting Preview: Tariffs, Data Noise, and the Wait-for-Clarity Doctrine

The Federal Reserve is widely expected to leave interest rates unchanged at this week’s policy meeting, maintaining the target range at 4.25–4.5% for a fourth consecutive gathering. While Chair Jerome Powell and his colleagues continue to emphasize a data-dependent posture, recent economic noise—fueled by tariff uncertainty, sentiment weakness, and conflicting data signals—has created a challenging backdrop for decision-making. Markets are keen to detect whether the central bank begins to pivot its tone, even subtly, toward a more dovish bias. But with jobs data strong and inflation stable, Powell may find himself narrating a policy stance that remains more patient than pliable.

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Macroeconomic Context: Strong Hard Data, Weak Soft Data

Hard data continue to support the Fed’s pause. The April jobs report showed robust payroll growth and a steady unemployment rate near 4.2%, which the Fed deems consistent with full employment. Meanwhile, services PMI and consumer spending metrics have remained resilient, suggesting underlying economic strength. Inflation, measured by PCE, has held near 2.6% annually—above target but not alarmingly so. However, the soft data have deteriorated: business and consumer sentiment surveys have fallen sharply, with uncertainty around tariffs cited as the key driver. Powell acknowledged this divergence last week in Chicago, saying, “Sentiment has clearly declined, particularly due to trade policy concerns, and we’re watching those signals closely.”

Powell’s Most Recent Signal: Holding Pattern, Tariff Watch

In his remarks at the Economics Club of Chicago, Powell made clear the Fed is in no rush. “We are well-positioned to wait for greater clarity before considering any adjustments to our policy stance,” he said. The Chair highlighted the dual threats of slower growth and rising costs stemming from the abrupt rollout of President Trump’s latest tariffs. While he emphasized the Fed’s commitment to its dual mandate, Powell warned that tariffs “are highly likely to generate at least a temporary rise in inflation,” and could evolve into more persistent pressures if inflation expectations drift upward. For now, however, Powell stressed that longer-term expectations remain anchored.

The CME Fed Funds Futures supports this notion with a 97% chance that the Fed will not move tomorrow. Of interest, the Fed has never moved with less than 60% chance:

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Tariffs, Stagflation Risk, and the Fed’s Dilemma

Fed officials appear divided on how to assess the inflationary risks from tariffs. Governor Christopher Waller downplayed the threat, calling the recent price increases “transitory” and suggesting the Fed could soon shift toward growth support if the labor market weakens. “I’m willing to look through whatever tariff price effects there are,” Waller said. In contrast, cleveland Fed President Beth Hammack expressed more caution, citing risks that cost shocks could embed into prices and wages. The tension reflects a broader dilemma: easing now risks fueling inflation, while holding could amplify downside risks to growth and employment—especially if tariff effects deepen into a stagflationary setup.

Sticky Inflation Chart:

The Political Overlay: Trump’s Pressure Campaign

Though Powell has repeatedly affirmed the Fed’s independence, political pressure has re-emerged as a variable. Former President Trump has criticized Powell as “Mr. Too Late” and continues to call for rate cuts. Powell, in response, has maintained a neutral tone but acknowledged that political uncertainty around trade, regulation, and fiscal policy complicates the macro outlook. Former Fed officials, including Robert Kaplan and Eric Rosengren, warn that the central bank may be caught in a “goalkeeper’s dilemma,” needing to choose which half of its mandate to prioritize if inflation and unemployment begin to move in opposite directions.

What to Watch at the May Meeting

The Fed’s policy statement is expected to reiterate that “the Committee will carefully assess incoming data and the evolving outlook.” But traders will be watching for any new language around tariffs, supply chain disruptions, or shifts in labor market dynamics. Powell’s press conference will also be scrutinized for his tone—whether he remains firm on holding or opens the door to cuts later this year. So far, the CME FedWatch tool shows only a 4% chance of a May cut, but markets are pricing in rate reductions beginning in July.

Powell’s April 16 Chicago Speech Sets the Stage for Fed Decision Amid Trade and Inflation Crosswinds

With the Federal Reserve’s next policy meeting fast approaching, Chair Jerome Powell’s wide-ranging remarks at the Economic Club of Chicago are now the most up-to-date insights into his thinking—and they were far from neutral. Powell struck a tone of cautious realism, acknowledging both persistent inflationary pressures and growing macroeconomic uncertainty, with tariffs and trade disruptions emerging as key variables that could derail progress on the Fed’s dual mandate.

“Despite heightened uncertainty and downside risks, the U.S. economy is still in a solid position,” Powell said, pointing to a labor market that remains “at or near maximum employment.” He also noted inflation had come down “a great deal” but continues to run above the 2% target. With incoming data showing slowing GDP growth—partially due to inventory front-loading ahead of expected tariffs—the Chair emphasized that the Fed is “well-positioned to wait for greater clarity” before adjusting policy. That line will likely be interpreted as a message to markets: don’t expect imminent cuts, especially with policy uncertainty still escalating.

Tariffs Back in the Foreground

Much of Powell’s commentary was devoted to the economic impact of recently announced tariffs—framing them as a central risk to both inflation and growth. “The level of tariff increases announced so far is significantly larger than anticipated,” Powell warned. He emphasized that such measures were already feeding into higher near-term inflation expectations, with survey-based and market-based measures both ticking upward.

Powell broke down the inflation risk into three components: the magnitude of the tariff shock, the time it takes for pass-through to consumer prices, and the anchoring of long-term inflation expectations. “Avoiding persistent inflation depends on keeping expectations well anchored,” he stated. His message was clear: while tariffs may produce a one-time spike in price levels, if public perception shifts, the Fed could be forced to act more aggressively to prevent entrenched inflation.

The Dot Plot:

A Balancing Act Ahead

Powell was blunt about the challenge posed by policy-driven supply shocks: the Fed’s tools are ill-equipped to handle simultaneous upward pressure on inflation and downward pressure on growth. “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said, adding that such a moment would require judgment on which mandate is further from being met, and how quickly each gap could realistically be closed. He reiterated the Fed’s obligation to ensure one-off price shocks “do not become an ongoing inflation problem.”

Powell’s tone throughout was consistent with a “hold and assess” posture, but he acknowledged that the balance of risks is becoming more precarious. Markets, he implied, should not mistake patience for complacency.

Labor Market and Immigration Dynamics

In assessing the labor market, Powell reiterated that it remains broadly in balance, with wage growth moderating and unemployment stable. However, he flagged that falling immigration could weigh on future labor force growth. “Since the previous administration changed its policies, the number of immigrants has sharply declined,” he said, noting that while this hasn’t yet disrupted equilibrium, it could become a constraint over time. He downplayed the inflationary implications of lower immigration, saying that demand and supply effects are likely to offset each other.

The St. Louis Fed’s Total Job Openings: Nonfarm series represents the total number of unfilled jobs across all nonfarm industries in the U.S. economy, as reported monthly by the Bureau of Labor Statistics' JOLTS survey. When total nonfarm job openings are declining, it typically signals weakening labor demand and a potential slowdown in hiring across the U.S. economy. As we can see in this chart and the inflation chart above, there is an opening for the Fed to make a slightly dovish pivot. However, the uncertainty around tariffs remain.

Market Volatility and the Fed’s Role

Powell pushed back against the idea of a “Fed put,” saying that while market volatility is elevated, financial markets are “functioning well.” He noted that U.S. Treasury yields have been rising rather than falling during recent risk-off episodes—an unusual dynamic attributed to deleveraging in hedge funds and uncertainty around fiscal policy and global trade. “The market is methodically playing its role as it should,” he said, indicating no near-term intervention is warranted unless dysfunction emerges.

On QT, Liquidity, and International Support

Regarding the Fed’s decision to slow the pace of balance sheet reduction, Powell explained that while reserves remain ample, high uncertainty around Treasury cash flows and liquidity effects led the FOMC to “proceed more cautiously.” He stressed that this approach offers a way to keep shrinking the balance sheet without provoking instability. Separately, Powell reaffirmed the Fed’s readiness to provide dollar liquidity to global central banks via swap lines “as needed,” citing the role of dollar markets in global financial stability.

Looking Ahead: Policy in a Cloud of Uncertainty

Perhaps the most sobering takeaway came in Powell’s reflections on the structural uncertainty now engulfing U.S. economic policy. “There is no modern experience on how to think about this issue,” he said, referring to the scale of policy changes around trade and fiscal dynamics. If that uncertainty persists, Powell warned, the U.S. may become “a jurisdiction with structurally higher risks,” dampening business investment and global confidence in the dollar.

Heading into the next Fed meeting, Powell’s Chicago comments should be viewed as a roadmap of competing priorities. Inflation is too high, but growth is slipping and political interference—from tariffs to immigration to fiscal instability—may complicate the path forward. For now, the Fed will wait, watch, and hope clarity emerges from the fog.

Bottom Line: Steady for Now, But the Clock Is Ticking

Expect no change in rates this week, and no sharp departure from the Fed’s current stance. However, the central bank’s margin for inaction is narrowing. As Powell said in Chicago, “We may find ourselves in a challenging scenario where our dual-mandate goals are in tension.” If incoming data deteriorates—particularly on the labor front—the dovish wing of the FOMC will likely gain traction. But for now, the Fed’s message to markets remains simple: wait, watch, and hope the data sorts itself out before the tariffs tip the scales.