Weekly Update 05/30/2025: Fed Minutes Detail Further Pause
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Fed thoughts
The Federal Reserve released the minutes to its May Federal Open Market Committee (FOMC) meeting this week after the standard three week delay. “Participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity,” according to the minutes. The FOMC kept rates unchanged at the end of their confab. It was the third consecutive meeting that the Fed chose to “pause” and keep its main tool, the federal funds rate, at a range of 4.25%-4.50%. The threat of tariffs hung over the proceedings and influenced the final decision. “Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer,” the minutes said. The FOMC meeting took place just days before the U.S. and China agreed to a temporary deal to lower levies on each other’s products for 90 days. Fed staff view the possibility of a recession to “be almost as likely as the baseline forecast.”
The chance of the Fed lowering the range at the next meeting, scheduled for June 18, is slim according to the futures markets. In fact, probabilities do not get over 50% until September at the earliest (and that is after today’s inflation data was released…details below). The uncertainty of policy under the current administration leaves them just as befuddled as investors. Even with the latest reprieve on European Union goods, duties remain historically high which is leading many businesses to put hiring and investment decisions on hold. That makes it harder to determine whether weakness in the labor department is due to a true slowdown in overall demand or merely companies being overly cautious. Fed staff predicted that the labor market was to weaken “substantially” this year and for unemployment to remain elevated through 2027.
Economic shrinkage
The second estimate from the Bureau of Economic Analysis was released this week on U.S. real gross domestic product for the first quarter. The economy shrank at a 0.2% annualized pace during the quarter, slightly better than the 0.3% contraction result from the initial reading. It showed that personal spending, which rose 1.8% on the first reading, was revised lower to 1.2%, representing the weakest pace in nearly two years. A surge in imports, driven by the current administration’s tariff policy, contributed to the decline as imports surged 42.6% during the quarter as businesses tried to beat any levy deadlines.
The update this week suggests that the economy was weaker than initially determined based on the April release. Final sales rose at a 2.5% pace during the quarter, the slowest in almost two years. The final sales figure combines consumer spending with business investment, thus removing any effect from inventories. Gross domestic income (GDI) measures income generated, and costs incurred from producing the goods and services that go into GDP—gross domestic product. GDI fell 0.2% for the quarter, following a 5.2% annualized gain in the fourth quarter. That was the first decline since the end of 2022. While business investment rose 10.3% during the quarter, corporate profits fell 2.9%, the most since 2020. These figures will be revised one more time before a “final” Q1 number goes into the books, but historically there has been little change after the second reading.
Labor trends
Applications for initial jobless claims rose by 14,000 in the week ended May 24 according to the Department of Labor. The total 240,000 claims were above the consensus estimate of 230,000. Continuing claims rose by 26,000 in the week ending May 17. The total 1.92 million is far higher than the 1.79 million in the comparable period last week. The Conference Board’s recent consumer confidence survey showed that 10% of consumers are extremely worried about losing their jobs while 13% are somewhat worried. The weekly data is more current than the monthly figures—we will not get the May unemployment report until June 6. The uptick in both initial and continuing claims suggests that the labor market, which has been surprisingly durable following the pandemic and through the worst of the Fed’s interest rate hikes, has begun to show more evident cracks. While it remains too early to ring any panic bells, subsequent data deserves a closer-than-usual watch, especially by the Fed. The health of the labor market is key to the growth in incomes and associated spending. Today we received the latest info on those metrics as well as inflation data from the Fed’s preferred measure—the personal consumption expenditure index (PCE).
Personal income, spending and confidence
According to the Bureau of Economic Analysis, the PCE index, excluding food and energy categories (the so-called ‘core’ rate), rose 0.1% in April, following a 0.1% rise in March. Year-over-year that translates into a 2.5% gain, slightly lower than a revised 2.7% in March. That was the smallest annual gain in more than four years. On a one-, three- and six-month annualized basis, core PCE slowed to 1.4%, 2.7% and 2.6%, respectively. Bloomberg’s measure of ‘supercore PCE’ which focuses on core services excluding housing Personal income last month surged 0.8%, much higher than the forecasted 0.3% growth and above the revised 0.7% gain in March.
While the headline numbers are impressive in terms of fighting inflation, they are not likely to change the Fed’s outlook much. The pace of hiring and wage growth slowed during the month as we saw in the initial claims described above. Prices rose in categories with heavy exposure to imports from China, and there has not been any breakthrough news recently on how negotiations between the two superpowers are going with the clock ticking on the expiration of their pause on higher reciprocal tariffs. Even as incomes rose, consumers pulled back on spending, reflecting a cautious stance. The bottom line is there is yet to appear a discernible trend in the economy, especially one handicapped by on again/off again tariff threats and legal pushback against their actual implementation. The latest University of Michigan one-year inflation expectations showing consumers thinking 6%+ inflation is on the horizon cannot be good news for the Fed who campaigned heavily against having high inflation expectations become embedded. On a positive note, overall consumer sentiment was unchanged in May from April, ending four consecutive months of declines. According to the survey summary: “Overall, consumers see the outlook for the economy as no worse than last month, but they remain quite worried about the future.”
Company Events
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