A Look Ahead: The Fed on Hold Amid Downside Employment Concerns and Upside Inflation Risks
This week, the economic calendar is centered on the latest FOMC rate decision expected Wednesday afternoon followed by Chairman Powell’s comments and updated perspective during the press conference.
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While widely expected to maintain policy in the current range of 4.25-4.50%, the accompanying communication at this week’s policy meeting could tip the Committee’s hand in terms of primary concerns, a policy lean, and/or expected timeline for any future adjustments in rates.?
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Maintaining a solid assessment of economic conditions and hiring, as well as the still elevated level of inflation, the Fed is likely to show little adjustment in expectations for additional policy cuts, at least in the near term, as the Committee continues to assess the incoming data and “uncertainty” surrounding tariffs and the Trump administration’s fiscal policy agenda.?The diversion of opinions around said forecast, however, are likely to widen among policy makers.
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Additionally, the Committee could opt to lower the caps on monthly portfolio reductions and/or explicitly identify additional factors, including specific fiscal policies, being considered in determining the timing and extent of any additional policy adjustments needed in the coming months.?
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Further details are offered in last Friday's edition of the Economic Insight, “March FOMC Preview: Amid Elevated Inflation and Fiscal Policy Uncertainty, the Fed Remains on Hold.”
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Returning to the economic calendar, this morning, retail sales rose 0.2% in February, falling short of the 0.6% rise expected and following a downwardly revised 1.2% drop in January (revised down from a 0.9% decline originally reported). While the 0.2% rise marks a two-month high, year-over-year, retail sales increased 3.1% in February, the weakest pace in four months.
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Car sales declined 0.4% in February following a 3.7% drop the month prior, and gasoline stations sales declined 1.0% in February following a 1.3% gain the month prior. Excluding autos, retail sales rose 0.3% in the second month of 2025 and climbed 3.1% over the past 12 months. Excluding autos and gasoline, retail sales increased 0.5% in February and rose 3.5% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales jumped 1.0% in February, surpassing the 0.4% gain expected and the largest monthly gain in five months. Over the past 12 months, control group sales rose 4.4%, the largest annual increase in two months.
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In the details of the report, non-store retailer sales gained 2.4%, health and personal care sales jumped 1.7%, and food and beverage sales rose 0.4% in February. Also, general merchandise sales rose 0.2%, despite a 1.7% drop in department store sales in the second month of the year. Additionally, building materials sales inched up 0.2% in February following four consecutive months of decline.
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On the other hand, furniture sales were flat (0.0%), while miscellaneous sales fell 0.3%, as did electronics sales in February. Also, clothing sales fell 0.6%, the second consecutive month of decline, and sporting goods sales declined 0.4% following a 3.1% drop the month prior.
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Bottom Line: While an improvement in spending activity relative to the start of the year, consumers remain hesitant to ramp up spending amid ample uncertainty and unknowns. Coupled with an anticipation of higher rates of inflation, an erosion of consumer confidence is taking a toll on both a willingness and ability to spend, potentially limiting upside potential for broader-based growth in the first quarter.?
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Also, this morning, the Empire Manufacturing Index dropped nearly 26 points from +5.7 to a reading of -20.0 in March, surpassing the expected decline to -1.9 and the lowest print since January 2024.
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In the details of the report, prices paid increased from 40.2 to 44.9, a two-year high, and prices received advanced from 19.6 to a reading of 22.4, the highest since 2023. Also, inventories climbed from 8.7 to 13.3 in March. On the other hand, new orders dropped more than 26 points to -14.9, the number of employees ticked down from -3.6 to -4.1 at the end of Q1, a three-month low, and the six-month general business conditions index dropped from 22.2 to 12.7, the lowest reading since late 2023.
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Finally, this morning, the NAHB Housing Market Index unexpectedly declined three points to a reading of 39 in March, a seven-month low. According to the median forecast, the index was expected to remain steady at 42 for a second consecutive month.
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Tomorrow, we’ll take an updated look at the housing market with February housing starts and building permits, along with import and export price indices, and industrial production and capacity utilization for February.
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Later in the week, on Wednesday, weekly mortgage applications will be released ahead of weekly jobless claims on Thursday, the March Philadelphia Fed Business Outlook Index, the Leading Index for February, and existing home sales.
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Wrapping up the week on Friday, while there are no economic releases to speak of, we will hear from New York Fed President John Williams, as the first to speak out in the aftermath of the Wednesday rate decision. Given all of the “uncertainties”?in today’s market, Williams has been clear he is still supportive of where policy currently stands but going forward, fiscal policies, regulatory policies, and other factors including the directional momentum and evolution of inflation will play deciding roles in the unknown pathway for rates.
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Recall, last?week, investors took a fresh look at inflation suggesting somewhat improved conditions.?Beginning with the consumer Price Index (CPI), the headline CPI rose 0.2% in February, and 2.8% year-over-year, a tenth of a percentage point less than expected and the first month of cooling after four consecutive months of acceleration.
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In the details of the report, other goods and services prices rose a sizable 0.6% in February, while a number of other components, while still increasing, cooled their rate of ascent from the month prior, including recreation prices, shelter, commodities, and education & communication prices, as well as energy prices.??
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Airline fare prices, on the other hand, dropped outright, falling a whopping 4.0% in February, the largest monthly decline since June. Year-over year, airline prices fell 0.7% and declined over 1% in the past five years.
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Excluding food and energy costs, the core CPI also rose less than expected, up 0.2% for the month and 3.1% on an annual basis, also cooling from a 3.3% pace in January, and marking the smallest annual increase since April 2021.
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Additionally, looking at another iteration of inflation, the supercore – defined as core services excluding housing – rose “just” 0.2% in February following a 0.8% rise the month prior, and increased 3.8% over the past 12 months. While still nearly double the Fed’s intended target of 2%, this marks the smallest annual increase since October of ’23.
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Turning to producer prices, the Producer Price Index (PPI) was unexpectedly flat (0.0%) in February, and rose 3.2% on an annual basis, a tenth of a percentage point less than expected and the smallest annual increase in three months. The core PPI, meanwhile, fell outright, down 0.1% in February, the first monthly decline since July. Over the past 12 months, the core PPI rose 3.4% on an annual basis, a tenth of a percentage point less than expected and a three-month low.
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Taken all together, a cooling PPI on the heels of a cooler-than-expected CPI?is a vast improvement. Still, while a welcome directional adjustment, after several months of accelerating price pressures, one month’s reprieve does little to instill confidence of a sustained disinflationary trend, especially as some of the larger monthly gains in the reports suggest some further price pressures to come (particularly in next month’s PCE report).
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Speaking of inflation and reflecting rising concerns regarding elevated prices and further upside inflationary risks stemming from fiscal policies, including additional tariffs, the latest survey-based small business optimism report fell sharply. The NFIB Small Business Optimism Index fell just over two points to a reading of 100.7 in February, surpassing the expected decline and marking a four-month low.
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According to the details, 85% of firms report no plans to hire within the next three months, while 88% reported that now is not a good time to expand their business. Additionally, the NFIB Uncertainty Index rose four points to a reading of 104.0 in February, the second highest reading on record.
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Meanwhile, consumers also continue to express growing concern regarding fiscal policy, inflation and the outlook for their personal financial conditions.?The University of Michigan Consumer Sentiment Index, for example, fell nearly seven points to a reading of 57.9 in the preliminary March report, surpassing the expected decline and dropping to the lowest print since November 2022.
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In the details off the report, a gauge of current conditions fell over two points to a six-month low, and a gauge of future expectations plunged nearly ten points to the lowest reading since July 2022, as consumers brace for further uncertainty and potentially higher inflation.
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In fact, a measure of short-term inflation expectations popped 60bps in the latest report from 4.3% to 4.9%, a two-year high after already rising 100bps at the start of the year.?
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Adding to the growing level of unease and uncertainty in the marketplace, last week, the Trump administration unveiled the latest round of international tariffs.?Aimed, this time, at metals, the White House announced increased tariffs on global steel and aluminum export to 25%.
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In response, some allies, including the European Union, have already announced reciprocal tariffs, as expected. The EU announced retaliatory tariffs on $28 billion worth of a wide range of U.S. goods including boats, motorbikes and alcohol set to take effect April 1 with additional countermeasures introduced in mid-April.?
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Despite the reduction in the tariff rate from the initially proposed 50% to the lower level of 25% on Canadian steel and aluminum imports, Canada announced its own countermeasures, vowing to increase tariffs on roughly $21 billion of U.S. goods, including steel and aluminum.
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Furthermore, the Bank of Canada announced a seventh-round rate cut shortly after the retaliatory measures were announced on Wednesday last week, taking its policy rate from 3.0% to 2.75%. According to Bank of Canada Governor, the central bank is moving policy “carefully” amid the ongoing implementation of tariffs.?
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Finally, last week, in the aftermath of a somewhat softer February employment report showing both an uptick in the unemployment rate and a rise in topline hiring to a two-month high, an updated look at the number of job openings offered further evidence of a still somewhat resilient – but uneven – labor market. Job openings, according to the JOLTS survey – or the Job Openings and Labor Turnover Survey – rose from 7.5M to 7.7M in January, a two-month high with the quits rate rising to a six-month high, the layoffs rate dropping to a seven-month low and the ratio of job openings to unemployed people rising to a two-month high.
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-Lindsey Piegza, Ph.D., Chief Economist