Powell Plays It Cool: Rates Steady, Markets Whipsaw, Patience Prevails

Federal Reserve Chair Jerome Powell delivered a press conference on May 7 that largely aligned with market expectations, skillfully threading the needle on monetary policy communication. While the Fed's updated statement included language viewed as marginally more hawkish—leading to an initial dip in S&P 500 futures to the 5600 level—markets quickly rebounded as Powell's tone was seen as consistent with prior messaging. The futures eventually bounced back to 5637, nearly the same level as before the directive was released, suggesting investors saw little in the way of surprise. Powell succeeded in reassuring markets that the Fed is in no rush, reiterating that policy remains "in a good place" and that the central bank can afford to be patient. However, subtle shifts in tone and emphasis, particularly regarding inflation risks and economic uncertainty, pushed market expectations for a June rate cut further into the future.

The most notable changes in the Fed's May policy statement were focused on the economic outlook and risk assessment. While the Fed maintained that economic activity continues to expand at a solid pace, it added a new qualifier noting that swings in net exports have distorted recent data. This was a nod to the sharp pull-forward in imports in Q1 ahead of anticipated tariffs, which temporarily depressed GDP. Powell emphasized that Private Domestic Final Purchases (PDFP)—a cleaner measure of core demand excluding government, trade, and inventories—grew at a 3% pace in Q1, in line with 2024 trends.

Inflation language remained unchanged, with the statement reiterating that inflation remains "somewhat elevated". However, the Fed sharpened its risk language, stating that uncertainty around the economic outlook has "increased further" and that the risks of both higher unemployment and higher inflation have risen. This dual-sided risk language appeared to reflect increased caution amid volatile macroeconomic conditions, particularly around trade policy.

One operational change was the removal of detailed language on balance sheet tapering, which had been present in the March statement. The new statement simply states that the Fed will continue reducing its holdings of Treasury securities and MBS, signaling that the slower runoff plan announced earlier is now in effect. Christopher Waller, who dissented in March over tapering pace, supported the May decision, suggesting increased internal alignment.

In his press conference, Powell reiterated that the policy rate is now only "somewhat restrictive"—100 basis points less so than last fall—and is currently well positioned for the Fed to wait and see. This specific language was key: by suggesting that rates are no longer highly restrictive, Powell indirectly supported the idea that the next move is more likely to be a cut, not a hike.

The Fed Chair also addressed the divergence between soft and hard data. He acknowledged that sentiment indicators and the Beige Book show increased business and consumer caution, with some firms delaying investment and hiring decisions. However, Powell stressed that these concerns have yet to show up meaningfully in the hard economic data. Employment remains stable, consumer spending continues, and overall demand appears resilient. He admitted that if the gloom in soft data persists, it could eventually manifest in weaker economic outcomes—but that moment hasn’t arrived yet.

On inflation, Powell described the "underlying inflation picture" as relatively stable, with modest readings in both housing and non-housing services. However, he admitted that there are still many unknowns, particularly around the potential for further price pressure from renewed tariffs and global supply chain disruptions. That said, he made clear the Fed sees no urgency to act and is comfortable monitoring the data as it evolves.

CME Fed Fund Futures June Rate Cut Expectations:

Markets quickly interpreted Powell’s tone as neutral. Though the Fed acknowledged higher inflation risks, Powell’s emphasis on patience and data dependence led to a decrease in rate cut expectations for June. The CME FedWatch Tool showed declining odds for both June and July cuts immediately following the press conference.

A key theme in Powell's remarks was the complexity of current economic readings. He spent significant time discussing PDFP as a more accurate indicator of U.S. demand than GDP, which was distorted in Q1 by the surge in pre-tariff imports. Powell suggested that Q2 might show an unusually strong contribution from net exports as that trend reverses, further muddling the growth signal. Despite this noise, Powell said the Fed remains focused on sustained trends in consumption and investment.

July CME Fed Fund Futures Rate Cut Expectations:

On trade, Powell acknowledged the uncertainty posed by ongoing tariff negotiations and potential new measures. While he refrained from speculating on the outcome of U.S.-China talks, he noted the initial tariff round on April 2 was far more severe than forecasters had expected. Powell emphasized that these developments could materially alter the Fed’s outlook, but at this point it is simply too soon to tell.

Powell also reiterated the Fed’s longstanding position on fiscal policy—that it’s outside their mandate. While acknowledging that the federal debt path is unsustainable, he refrained from commenting on the implications of tax extensions or budget negotiations, other than to say the Fed incorporates fiscal conditions into its economic models.

In sum, Powell delivered a steady, measured message that reinforced the Fed's desire to remain patient amid ongoing macroeconomic crosscurrents. While the statement adopted a slightly more hawkish tone on risk, Powell’s repeated insistence that policy is in a "good place" suggested the bar for tightening remains high. At the same time, with inflation still elevated and economic uncertainty rising, the bar for easing isn’t low either. As of now, the Fed appears content to watch and wait—a message that may not excite markets but reflects the economic ambiguity facing policymakers.