THE FED'S NEXT MOVE: Hedged Messaging, Data Crosscurrents, and the Rates Dilemma
The Federal Reserve, led by Chair Jerome Powell, continues to embody its reputation as a hedged institution. Officials frequently deliver mixed signals to preserve flexibility. In May, Powell described the U.S. economic situation as "very uncertain," refusing to commit to a policy direction:
“It’s not at all clear what the appropriate response for monetary policy is at this time.”
This cautious posture is deliberate—but also familiar. The Fed is not just hedged; it's historically reactive. With dual mandates grounded in lagging indicators—inflation and employment—the institution tends to wait until data is undeniable before pivoting. Its moves are rarely anticipatory. Instead, the Fed waits until markets, jobs, and price levels force its hand. As a result, it often arrives late to both the inflation fight and the growth rescue.
That institutional design explains today’s ambiguous communication. With inflation ticking up due to tariffs and growth indicators turning cloudy, Powell and colleagues are standing still—carefully watching the data, but unwilling to get in front of it.
Split Messaging: Competing Fed Narratives
Some Fed officials are sounding alarms. Fed Governor Adriana Kugler stressed the need to keep rates high for “some time” to combat inflation. St. Louis Fed President Alberto Musalem argued that new tariffs and immigration constraints could stall disinflation and necessitate a more restrictive policy path.
Others are more dovish. Atlanta Fed President Raphael Bostic expects two cuts in 2025, while Chicago’s Austan Goolsbee highlighted the progress already made on inflation, urging patience and caution.
These divergences are not accidental. They’re part of the Fed’s long-standing strategy of hedging—floating a range of interpretations while avoiding commitment. Powell regularly returns to the same refrain: they are “data dependent.” What that really means: we’re not going to act until the data makes the decision for us.
Inflation: Solved—Until It Wasn’t
Headline and core inflation cooled into early 2025, with core PCE hitting 2.3% in March. Powell even acknowledged inflation “appeared solved.” But the Trump administration’s surprise tariffs have flipped that narrative. Goldman Sachs estimates these import taxes could add up to 2.25 percentage points to core inflation by early 2026.
The Fed now faces a textbook stagflation dilemma: rising costs due to trade barriers paired with slower demand. It’s the type of exogenous shock that blurs the policy path—and ensures the Fed does nothing until outcomes become clear.
Labor Market: Still Resilient, But Cooling
The unemployment rate has crept up to 4.2%, from the post-pandemic low of 3.4%. April’s jobs report showed 177,000 new payrolls—steady, but down from last year’s pace. Beneath the surface, softness is emerging: job losses in Q1 2025 totaled nearly 500,000, particularly in goods-producing sectors.
For now, Fed officials characterize the labor market as “healthy but cooling.” That buys them time. But if job losses continue to mount or unemployment pushes beyond 5%, a shift in posture becomes more likely. Still, true to form, the Fed is unlikely to lead that pivot. They’ll react when it’s confirmed—not anticipate it.
Growth: The Economy Hits a Speed Bump
After a 2.4% expansion in Q4 2024, GDP contracted 0.3% in Q1 2025. Consumer spending slowed, and confidence dropped to levels not seen since early 2020. Businesses pulled back investment amid tariff uncertainty. Yet Powell was quick to call this a "bump," not a turning point.
This is typical Fed behavior: don’t overreact to noise. But the risk is that by the time the Fed distinguishes signal from noise, the economy has moved on—usually in the wrong direction.
Tariffs: A Supply Shock in Motion
Powell called the new tariffs “significantly larger than anticipated.” The Fed sees them as a stagflationary supply shock—raising prices while damping growth. Officials are watching for second-round effects in consumer prices and inflation expectations.
But once again, don’t expect preemptive action. The Fed is waiting to see how it plays out in the data—months from now. That’s the paradox: the Fed can’t respond until it's already too late to avoid some damage.
Reaction Thresholds: What Forces a Move
Despite all the ambiguity, the Fed appears to be anchoring around two soft thresholds:
- Inflation: If core inflation clearly trends toward 2%, rate cuts are likely. But persistent readings above 2.5%—especially with rising expectations—could force hawkish patience.
- Unemployment: A sustained move above mid-4% levels, especially with broad-based job losses, could tip the balance toward easing. The Fed’s own March SEP forecast unemployment at 4.1% by year-end; a meaningful overshoot would be tough to ignore.
But again, the Fed is not predictive. They’ll wait for clear and confirmed trends before moving. That often means policy arrives after the inflection point—not before.
Markets and Sell-Side Forecasts: Divergence Widens
Markets are pricing in one to two cuts by late 2025, with futures implying easing in Q3 or Q4. Sell-side shops are split:
- Goldman Sachs expects three cuts (July, September, November), citing recession risk from tariffs.
- J.P. Morgan expects one or two cuts in H2 2025, contingent on inflation cooperating.
- Morgan Stanley says no cuts until 2026 if inflation proves sticky.
These forecasts mirror the Fed’s own internal split. More importantly, December Fed Funds futures now price ~40 bps below the Fed’s median dot plot, signaling that markets expect the Fed to eventually fold—even if Powell isn’t ready to say so.
Treasury Yields and the Debt Wall
The Fed’s room to maneuver is further constrained by Treasury market dynamics.
Roughly $9.2 trillion in U.S. debt matures in 2025—about 30% of GDP. Add another $1.9 trillion in projected deficit issuance, and you’re staring at $10–11 trillion in total refinancing.
Yields reflect that pressure:
- 3-month bills: ~4.3%
- 2-year: ~4.0%
- 10-year: ~4.5%
- 30-year: ~5.0%
The front of the curve is inverted, but long rates remain elevated as investors demand compensation for duration, inflation risk, and supply indigestion.
So far, auctions have held up. But Treasury’s interest expense is exploding: $950 billion in FY2025, likely $1 trillion+ in 2026. While the Fed doesn’t explicitly manage Treasury funding costs, they can’t ignore the consequences. If yields spike further or auctions falter, the Fed could halt QT—or, if markets seize, step in more directly.
Conclusion: Wait for the Obvious
The Fed’s next move remains elusive—and that’s by design. Powell and his colleagues won’t pre-empt anything. Instead, they’ll wait until the data paints a clear and inescapable picture. That means confirmation of inflation falling to target or meaningful damage in the labor market.
Until then, we’re in limbo: no hikes, no cuts, just data watching. That leaves markets to price probabilities and guess which threshold will break first.
For now, the Fed’s reputation as a trailing institution holds. It will not act until it must—and by then, the market may already be two steps ahead.