FedSpeak Meets Legal Jargon

Susan Hill, CFA - Senior Vice President, Senior Portfolio Manager, Head of Government Liquidity Group

The press room of the Federal Reserve headquarters had the ambience of a court yesterday. Chair Jerome Powell essentially made an opening statement that he would stay on as “chair pro tempore” until the Senate confirms his successor. He laid out the argument for the legality of the decision, pointing out that the Fed has taken the approach before, including with him saying: “That is what the law calls for.”

Exhibit B, so to speak, was the Trump administration’s criminal investigation into Powell’s handling of the renovations of its building on the Mall in Washington, D.C. Powell said he will not leave the Fed until the probe is “well and truly over.” He said he was undecided as to whether he would stay on the Fed as a governor even after a new chair is in place and the investigation concluded.

Compared to that drama, monetary policy met expectations. The Federal Open Market Committee (FOMC) left the fed funds target range unchanged at 3.50-3.75%. An anticipated dissent came from Governor Miran, who preferred a 25 basis-point cut.

The FOMC statement and the accompanying updated Summary of Economic Projections (SEP) leaned dovish, but that sentiment changed as the rest of the press conference decidedly focused on inflation.

Powell said that if there was any meeting in which the SEP should be skipped, it was probably this one. Case in point, the dots were a bit of a mess, though they did not alter the forecast for one 25 basis-point ease in 2026. But it is hard to overlook the uptick in inflation projections. Participants increased their prediction of core PCE growth in 2026 from 2.5% in December’s meeting to 2.7%. Powell acknowledged that inflation — specifically, core goods inflation — is taking longer than anticipated to subside. He attributed much of the pressure to tariffs but admitted that the surge in oil prices related to the Middle East conflict creates significant economic uncertainty.

And so, the Fed finds itself in a difficult spot yet again, as concern over prices is balanced by low job creation. The geopolitical uncertainty does give the Fed one more reason to stay on the sidelines. The markets seem to have accepted this. The fed funds futures contracts have priced out any cut for the remainder of this year. In fact, a 25 basis-point rate cut does not even show up in futures pricing until late 2027.

The front end of the Treasury yield curve rose a handful of basis points and is flatter than it has been for quite some time. Bond equivalent yields on Treasury bill maturities ranging from one month to one year hover just shy of 3.70%. These developments seem a bit overdone; for now, we are in line with the Fed projections of one cut this year.

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