We expect the 7th May FOMC meeting to be uneventful. The meeting statement will likely be largely unchanged, and there will be no updated dot plot or economic projections. Chair Powell’s press conference will likely echo his recent April speeches, emphasizing the importance of the inflation mandate and pushing back on the likelihood of pre-emptive “insurance” cuts. With the labor market still "solid", Powell is likely to continue to emphasize the inflation side of the dual mandate. This could include repeating that it is the Fed's "obligation" to ensure tariff-driven inflation does not become more persistent and that sustainable maximum employment requires price stability. The signal will be that the labor market needs to weaken for the Fed to contemplate cuts. Our own view is that sooner than later, the employment mandate of Fed might take priority over it’s inflation mandate as unemployment rate starts going up north of 4.5% by Q3CY25. We believe tariffs impact on growth is likely to be higher than inflation. There is plenty of time for one or the other risk – higher inflation (or inflation expectations) or weaker activity – to show that it is the greater problem. In our view it will be weaker activity. Should some economic weakness begin to materialize, many policymakers will begin to argue that moving policy to a more balanced stance is warranted. We believe that would make an effective case for cuts – not for a long series of cuts necessarily, but for a couple of 25 bp cuts. And that’s where we still see 3 rate cuts of 25 bps each in REMCY25. The depth of this rate cut cycle will depend on the balance of higher inflation and slower growth.
