Powell’s Final Message: Signal Over Volatility

• The Federal Reserve left interest rates unchanged.

• Real rates remain in positive territory.

• Powell noted that policymakers weren’t interested in raising rates.

Our central bank is trying to focus on the signal and look through the noise…

Yesterday, the Federal Reserve released its latest monetary policy decision, leaving the federal funds target unchanged at 3.50% to 3.75%. Policymakers noted that the economy continues to expand at a solid pace, the labor market is still soft, and headline inflation has been pushed higher by the conflict in the Middle East.

What drew the most attention was the dissent of four voting members of the Federal Open Market Committee, the first time that’s happened since 1992. But none of it should be viewed as a surprise. Governor Stephen Miran has consistently argued for easing since his appointment, while three of the more hawkish members — Beth Hammack (Cleveland), Lorie Logan (Dallas), and Neel Kashkari (Minneapolis) — opposed maintaining an easing bias.

The real surprise came from Chair Jerome Powell. With this likely being his final meeting at the helm, one might have expected sharper language or a more forceful signal. And given the ongoing tension with the White House over the pace of rate cuts, some observers anticipated he might hint at the possibility of tightening. He did not.

Instead, Powell emphasized that the Fed’s mandate is to foster economic conditions that allow American families and businesses to thrive. He explained that policymakers are prepared to look through the temporary effects of tariffs and the Iran conflict, viewing both as short lived influences on inflation. Officials still see the potential for lowering interest rates later this year. That dynamic, if realized, would provide additional support for a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what Powell said…

The Fed chair made his position clear from the start of the press conference. When asked how the inflation outlook had evolved since March, Powell noted that the upward pressure from last year’s tariffs should fade over the next couple of quarters as the comparisons roll off. In other words, the base effects that lifted inflation should begin to unwind, reinforcing the Committee’s bias toward easing.

He then addressed the recent jump in oil prices. Powell acknowledged that the conflict in Iran has complicated the inflation picture, but he stressed that policymakers are willing to be patient. If the situation stabilizes and oil supply returns to global markets, the resulting decline in fuel prices could quickly pull headline inflation lower. That’s why most officials remain comfortable with an easing bias. However, they are not prepared to move until the tariff, and oil effects subside.

To understand the Fed’s room for maneuver, it helps to look at real interest rates, or the effective fed funds rate minus headline inflation…

The latest Consumer Price Index (“CPI”) report showed 3.3% inflation growth, while the effective fed funds rate stands at 3.6%. That puts real rates at 0.3%, implying roughly 30 basis points of room before policy reaches neutral. However, the Fed has managed real rates to an average of -0.6% since 2000. That suggests the potential stimulus cushion is closer to 90 basis points.

Prior to the Iran conflict, CPI growth was running around 0.1% to 0.2% per month. So, let’s look at what might happen if the conflict is resolved, the Fed leaves rates unchanged, and CPI returns to the 0.2% monthly level…

Based on the math, the central bank’s rate cut cushion would fluctuate around 50 to 70 basis points for most of this year before touching neutral in January. But by March, it would rebound to the 120 basis point level. That’s where it was before the Iran conflict began.

At the end of the day, if the U.S. can resolve the issues with Iran sooner than later, that should get oil prices and headline inflation growth declining once more. Powell said Fed officials feel monetary policy is in a good place. He stated that while several voters were against easing bias, no one on the FOMC favored a rate hike.

As Powell underscored, the Fed is trying to stay focused on the signal, not the short-term noise. Officials believe the labor market remains soft, the economy is performing well, and interest rates are still mildly restrictive. The combination leaves room for easing once the temporary inflation pressures fade. That backdrop should support a steady, long-term rally in the S&P 500.

Five Stories Moving the Market:

Amazon reported cloud sales ​growth above Wall Street expectations, driven by strong enterprise spending as companies continue to devote tremendous resources to their artificial intelligence efforts – Reuters. (Why you should care – the company said AWS growth was capacity constrained while its chip sales experienced triple digit year-over-year growth)

Google parent company Alphabet reported a 22% surge in first-quarter revenue as the artificial intelligence race fuels growth of its cloud business; Alphabet’s sales reached about $110 billion, exceeding Wall Street’s expectations – WSJ. (Why you should care – the company revised its capital expenditures guidance modestly higher, easing worst-case fears)

Federal Reserve officials left interest rates unchanged but revealed a deepening division over the outlook for policy amid increased uncertainty caused by the conflict in the Middle East – Bloomberg. (Why you should care – while four dissenters are the most since 1992, two of the three who were against an easing bias were hawkish coming into this year)

U.S. President Donald Trump said he's going to keep Iran under a naval blockade until the regime agrees to a deal that addresses U.S. concerns about its nuclear program; Trump is rejecting an Iranian proposal to first open the Strait of Hormuz and lift the blockade, while postponing nuclear talks to a later stage – AXIOS. (Why you should care – U.S. Central Command is said to have prepared a wave of powerful strikes to try and force Iran to the negotiating table)

Two months into a war with the U.S. and Israel, Iran no longer has a single, undisputed clerical arbiter at the pinnacle of power — an abrupt break with the past that may be hardening Tehran’s stance as it weighs renewed talks with ​Washington; wartime pressure has concentrated power into a narrower, harder-line inner circle rooted in the Supreme National Security Council and the Islamic Revolutionary Guards Corp, which now dominates both military strategy and key political decisions – Reuters. (Why you should care – Pakistani mediators have said there is no single decision-making command structure, which is further complicating the negotiation process)

Economic Calendar:

Earnings: AAPL, AMGN, BMY, CAT, COP, LLY, MA, MO, MRK, PWR, SNDK, WDC

China – Official Manufacturing, Non‑Manufacturing, Composite PMI for April

China – Caixin China Manufacturing PMI for April

Japan – Industrial Production, Retail Sales for March

Germany – Import Price Index for March (1 a.m.)

Germany – Retail Sales for March (2 a.m.)

Eurozone – CPI for April (5 a.m.)

Eurozone – GDP for Q1 (5 a.m.)

Eurozone – Unemployment Rate for March (5 a.m.)

Bank of England Monetary Policy Announcement (7 a.m.)

European Central Bank Monetary Policy Announcement (8:15 a.m.)

U.S. – GDP for Q1 (8:30 a.m.)

U.S. - Initial Jobless Claims (8:30 a.m.)

U.S. - Continuing Claims (8:30 a.m.)

U.S. – PCE for March (8:30 a.m.)

ECB’s Lagarde (President) Speaks (8:45 a.m.)

BoE’s Bailey (Governor) Speaks (9:15 a.m.)

ECB’s Lagarde (President) Speaks (11:15 a.m.)

Treasury Auctions $44 Billion in 7-Year Note (1 p.m.)

Fed's Balance Sheet Update (4:30 p.m.)