Fin-X Pulse 8th May 2025

The Federal Reserve left policy settings unchanged. But there was lots of new information on how the FOMC views the policy outlook and the parameters of any future response. At the same time, the Treasury Secretary provided an update on the timelines surrounding trade deals. Even if his timeline proves accurate and not too optimistic, a US recession appears increasingly likely.

• The FOMC left the Federal Funds policy rate unchanged in the 4.25% - 4.50% range overnight and maintained the pace of balance sheet reduction at US$ -40 billion per month.

• The Federal Reserve made two notable changes to the first two paragraphs of the statement, leaving the rest unchanged from March:

  • "Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilised at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.

  • "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen."

• In prepared remarks at the press conference, Chair Powell added, "The risks of higher unemployment and higher inflation appear to have risen, and we believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments [...]

• "GDP was reported to have edged down in the first quarter, reflecting swings in net exports that were likely driven by businesses bringing in imports ahead of potential tariffs. This unusual swing complicated GDP measurement last quarter. Private domestic final purchases, or PDFP—which excludes net exports, inventory investment, and government spending—grew at a solid 3 percent rate in the first quarter, the same as last year’s pace. Within PDFP, growth of consumer spending moderated while investment in equipment and intangibles rebounded from weakness in the fourth quarter. Surveys of households and businesses, however, report a sharp decline in sentiment and elevated uncertainty about the economic outlook, largely reflecting trade policy concerns. It remains to be seen how these developments might affect future spending and investment [...]

• "Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment [..]

• On the policy outlook he said, "The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. The tariff increases announced so far have been significantly larger than anticipated. All of these policies are still evolving, however, and their effects on the economy remain highly uncertain. As economic conditions evolve, we will continue to determine the appropriate stance of monetary policy based on the incoming data, the outlook, and the balance of risks.

• "If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment. The effects on inflation could be short-lived—reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and, ultimately, on keeping longer-term inflation expectations well anchored.

• "Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans.

• "We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close. For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance."

• Testifying in Congress, Treasury Secretary Scott Bessent announced that the US is on the verge of finalising new tariff agreements with 17 major trading partners, with announcements likely as soon as this week. He projected that 80–90% of these agreements could be completed by the end of the year.

• He added that clarified that there are no ongoing trade negotiations with China, contradicting earlier statements from President Trump. He stated that the onus is on China to ease tensions, given their trade surplus with the US.

• He further assured lawmakers that the US would not default and indicated that raising the debt ceiling is a priority, tied to legislation expected before 4th July.

• S&P500 5,631 +0.4%, Nasdaq Comp. 17,738 +0.3%, S&P/ASX200 future 8,178 +0.3%,

• US 2yr 3.78% (unch), US 10yr 4.27% -3bps

• US dollar (DXY) index 99.61 +0.4%, AUDUSD 0.6424 -1.1%, Gold US$/oz 3,365 -2.0%

Fin-X Wealth View

• Despite the fact that policy settings were unaltered, we learned a fair amount about discussions between FOMC members.

• It was evident that the Committee also views the White House policy outlook, as well as the future path of the economy, as unusually uncertain.

• Higher inflation expectations are a risk that leans towards tighter policy while rising unemployment would tend to require easing. The two policy objectives could be in conflict and may require a "difficult judgement" in the future. Key inputs would be how far different series are from the target and how long they will take to return to target.

• There appeared to be a wide consensus to wait and see how the incoming data would evolve and that the combination of previous strength in activity and current policy settings allowed them to be patient.

• Notably, the recent period of higher inflation made it difficult to act pre-emptively, suggesting that they know they will be late to respond if the data eventually indicates higher recessionary risks so that any downturn could be more severe than it otherwise would be.

• Scott Bessent tried to paint a rosy picture for Congress. But it is clear that the meaningful trade deals will take months at least.

• Our view is that a US recession is the most likely scenario. The question is how much tariffs and goods shortages spread to cause higher inflation and to what extent.

• A +20% increase to March tariffs is estimated by the Yale Budget Lab to raise consumer prices by +2.1% (no retaliation) to +2.6% (with retaliation). However, under the first round of tariffs, price rises spread to domestically produced goods. So there are still broader upside risks to CPI. The outcome will depend on future trade policy and the response by businesses.

• So far, tariff increases are confined to goods. But this week's announcement that foreign movies could attract a 100% tariff potentially opens the door to service tariffs. US service exports were 3.7% of GDP in 2023, generating a net surplus of 1.0%. Retaliatory service tariffs would not be good news for US tech and media giants.

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