FOMC Preview: When Will Powell Turn Dovish Amid Tariff Tensions? - moomoo Community

The Federal Reserve’s May 2025 FOMC meeting stands as a pivotal moment for investors navigating a landscape shaped by trade tensions and economic uncertainty. With President Trump’s 10% tariffs on U.S. imports complicating the Fed’s dual mandate of price stability and full employment, the central bank faces a delicate balancing act. Here’s what markets are watching—and why patience may still be the Fed’s watchword.

The Tariff Effect: A Double-Edged Sword

The Fed’s decision to hold the federal funds rate steady at 4.25% to 4.5% in May reflects its cautious stance toward President Trump’s trade policies. While tariffs aim to shield domestic industries, they risk disrupting supply chains and inflating prices. Recent data underscores this tension:
- Inflation has moderated to 2.3% (year-over-year), nearing the Fed’s 2% target, but tariffs threaten to reverse this progress.
- GDP contracted by 0.3% in Q1 2025, partly due to a surge in imports ahead of the tariffs, though economists anticipate a rebound in Q2.
- Unemployment remains low at 4.2%, but businesses report rising costs and hiring hesitancy.

The Fed’s Dilemma: Data-Driven or Preemptive?

Fed Chair Jerome Powell has emphasized that policy decisions will depend on evolving economic conditions, not preemptive moves. The May statement noted that “swings in net exports have affected the data,” directly tying trade policy to economic volatility. Key considerations for the Fed include:
1. Inflation Risks: Tariffs could trigger a one-time price spike, complicating the Fed’s inflation targeting.
2. Employment Stability: Resilient job growth (177,000 nonfarm payrolls in April) may deter immediate rate cuts.
3. Global Spillover: Trade disputes could amplify global economic slowdowns, further pressuring U.S. exports.

Market Expectations: Betting on Rate Cuts

Despite the Fed’s patience, markets are pricing in a low probability of immediate rate hikes and anticipating three rate cuts by year-end, contingent on trade negotiations. This optimism hinges on two assumptions:
- Trade Resolution: A de-escalation of tariffs would ease inflationary pressures and stabilize growth.
- Data Rebound: Strong Q2 GDP and falling unemployment could signal resilience.

Equity markets responded positively ahead of the May meeting, with the Dow rising 0.93%, while bond yields edged higher—10-year Treasuries at 4.287% and 2-year yields at 3.8%—reflecting divided investor sentiment.

The Stagflation Shadow

The Fed remains wary of a stagflation scenario, where high inflation collides with stagnant growth. While policymakers currently describe the economy as “expanding at a solid pace,” the risks are clear:
- Consumption: Slower consumer spending (driven by 6.9% 30-year mortgage rates and 20.12% credit card rates) could crimp demand.
- Investment: Businesses may delay capital spending amid trade uncertainty, further depressing growth.

Conclusion: The Fed’s Tightrope Walk

The Fed’s May decision to hold rates steady underscores its reluctance to gamble on an uncertain trade environment. Investors should expect the central bank to remain data-dependent, with three critical factors determining its next move:
1. Trade Outcomes: A rollback of tariffs would reduce inflation risks and support growth.
2. Q2 GDP: A rebound above 1% would bolster confidence in the economy’s resilience.
3. Inflation Trends: A sustained decline in the PCE index below 2.3% could justify easing.

For now, markets are pricing in a dovish turn by year-end, but the Fed’s track record of caution suggests it will wait for clearer signals. With unemployment low and inflation near target, the Fed’s next move hinges on whether trade policies stabilize or escalate—a reminder that in today’s economy, politics and economics are intertwined like never before.