We expect that FOMC will hold rates unchanged and again signal great uncertainty about the economic and policy outlooks. The slightly tight stance of policy remains a critical element in maintaining a consensus for rate cuts sometime this year. We expect a median projection of two cuts for 2025 in the DOTS similar to the March meeting. Labor and inflation data have been dovish, but forecast updates will be complicated by tariff escalation since the March meeting. The 3m average of nonfarm payrolls growth was just 135k in the May employment report, compared to a real-time estimate at the March meeting just below 200k. Alternative measures of job gains from ADP and the household survey demonstrate even greater deceleration. Hard data on growth and spending appears to be slowing, consistent with earlier weakness in surveys and sentiment indicators. The monthly core inflation data & core PPI, including the May data out last week, have recently been better than earlier this year. There has been little sign yet of broad price pressure from tariffs. Core PCE inflation has averaged just above 10bp in March and April, and we expect another soft reading in May to bring the 3m annualized pace to 1.5%. Tariff-sensitive goods prices have been mixed, with some isolated signs of cost pressure, but no evidence of broad acceleration. Low inflation prints through May are dovish developments as recent benign inflation prints could lead to some revaluation about potential magnitude and timing of passthrough of price pressures, as well as, direct and indirect effects. In addition, the recent pick-up in job losses could also make some members concerned about a labor market downturn. These two developments might force the Fed DOTS to remain at 2 cuts for REMCY25. We also believe May CPI & PPI nos reflect that corporates are not able to pass through full price increase either due to weak consumer demand or due to previous significant inventory holdings. We expect some pick up in core PCE to end Dec’25 now at 3.1% rather than the previous 3.4% considering these developments. The recent middle east tension will play out more on growth than inflation as US gasoline prices are not directly correlated to Brent since most of consumption happens from domestic shale production. But any elevation in fuel prices might impact adversely the already weak consumer spending power leading to lower aggregate demand & employment.
