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Fed holds rates steady as Middle East uncertainty clouds outlook. (0:16) Dot plot still pencils in one rate cut this year. (0:37) Powell will wait until investigation ‘well and truly over.’ (1:20)
The following is an abridged transcript:
This is a special Fed edition of Wall Street Lunch
Amid what one economist calls a “central banker’s nightmare” of inflation and labor market risks, the Federal Reserve clearly thinks discretion is the better part of valor.
In what one analyst described as “the least surprising decision ever,” the Fed held rates steady at 3.5%–3.75%. The policy statement was largely unchanged, aside from noting that developments in the Middle East are “uncertain.”
That uncertainty extended to the new Summary of Economic Projections, which still penciled on rate cut this year. In fact, Fed Chairman Powell described the new dot plot as a case of Fed members just having to “write something down,” and given the limited view on the oil shock they’d have preferred to skip it altogether if they could.
The biggest shift in the projections was higher inflation in 2026, with both headline and core PCE seen at 2.7%, still above the Fed’s 2% target.
“Basically, these projections assume no real impact from the war – presumably because it’s too early to tell what those effects will be,” economist Dario Perkins said.
During the press conference, Powell acknowledged the balancing act, saying it remains unclear whether inflation or labor market weakness poses the greater risk.
Away from monetary policy, Powell said he has no intention of leaving the Fed until the Justice Department investigation is “well and truly over” and would serve as chairman pro-tem if Kevin Warsh’s nomination is delayed. He added he hasn’t decided to stay on as a Fed governor once the matter is resolved.
Further highlights:
- Powell said oil producers are unlikely to boost output unless prices stay sharply elevated for an extended period.
- Most FOMC members do not see a rate hike as the base case, but there will be no cut without further progress on inflation.
- Fed governor Stephen Miran kept his streak alive of dissenting at every meeting, calling for a quarter-point cut. It’s also very likely he’s the one dot still looking for four cuts this year.
- In a possible nod to the DOJ probe, Powell said the Fed will continue “to do our jobs with objectivity, integrity and a deep commitment to serve the American people.”
Looking to the market, traders appeared to take a hawkish view of the decision and presser, with a decidedly risk-off move.
The major averages, already in the red after a hot PPI numbers, fell steadily as Powell spoke. The S&P (SP500) closed down 1.4%, while the Nasdaq Composite (COMP.IND) lost 1.5% and the Dow (DJI) ended off 1.6%.
Treasury yields rose immediately after the decision, with the 10-year (US10Y) moving back above 4.25% and the dollar index (DXY) topped 100.
And the odds of the Fed staying on hold through the year jumped around 15 percentage points to 45%.
Strategist Peter Boockvar quipped that “oil is the new Fed chair” — for now.