Like a Thermostat Set to “Let’s Wait and See”
Laura: So, another meeting the Fed’s on hold?
Will: The Fed decided to keep interest rates right where they are—like a thermostat set to “let’s wait and see.” They think the current setting is just right to handle whatever economic weirdness comes next. The economy’s doing okay, unemployment is low, and inflation is behaving… sort of. It’s not quite at the 2% “golden snitch” level, but we’re getting there.
Laura: How is the Fed feeling about the economy?
Will: Consumers and businesses are feeling a bit “meh.” Sentiment has dipped thanks to trade drama and general uncertainty. It’s like everyone’s waiting to see if the sequel to “Tariff Wars” is better or worse than the original. GDP dipped a bit in Q1, but don’t panic—it’s mostly because businesses went on a shopping spree for imports before tariffs hit. If you ignore the noisy stuff (like net exports and government spending), the economy actually grew at a solid 2.5%. So, not bad!
Laura: Is the Job Market Still Strong?
Will: Yep, jobs are still being added, unemployment is chillin’ at 4.2%, and wages are rising faster than inflation. It’s not a party, but it’s definitely a solid potluck. Although, it is possible the potluck ends early, initial jobless claims (unemployment benefits) and continuing claims data is edging up and it’s taking a longer time to find a job if you are looking. Not a good sign.
Laura: What’s the inflation vibe?
Will: Core PCE is at 2.6%, and headline PCE is at 2.3%. Importantly core services (housing and non-housing services) are more favorable. Good progress but not that 2% JP is looking for. Tariffs are the new troublemaker, creating uncertainty and nudging goods prices up. The Fed’s watching closely to make sure this doesn’t turn into a full-blown inflation sequel.
Laura: Are tariffs the villian in this story?
Will: Kind of. They’re like that one character who might be misunderstood… or might blow up the plot. Tariffs could cause a one-time price jump (not necessarily inflationary) or they could be more persistent and cause inflationary pressure. The Fed’s trying to keep expectations anchored so things don’t spiral.
Laura: What’s the plan for interest rates?
Will: The Fed’s crystal ball (aka the SEP) says rates will be 3.9% by the end of this year, then slowly drift down to 3.4% by 2027. This is more than 1% higher than where they were last year. Chair Powell reminded us, several times, the SEP isn’t a script. We wonder is this shaping up like 2024. Hold off on easing policy rates till you have to do something dramatic. It’s going to come down to the job market. All eyes on the consumer. If employed they will spend. No job, no consumption.