The Federal Reserve meets this week facing what you might call a high-class problem – an economy that's neither overheating nor freezing up. With the job market cooling but not crashing, policymakers are probably feeling pretty good about their chances of pulling off that rarest of economic feats: the soft landing.
Let's be clear about one thing. Nobody's expecting rate cuts at this meeting. Not happening. The real question is whether Chair Powell and company will signal when they might finally ease their foot off the economic brake.
Recent jobs data tells a pretty compelling story. Employers added 175,000 positions last month – not gangbusters by pandemic recovery standards, but still solid enough to keep things humming along. Unemployment ticked up to 3.9%, which sounds worse than it is. I've covered enough recessions to know what real labor market pain looks like, and this ain't it.
Wage growth has settled into a more manageable 4% range. That's the kind of number that lets Fed officials sleep at night instead of having inflation nightmares.
Remember January? Markets were convinced we'd see six – yes, SIX – rate cuts this year. That prediction has vanished faster than free coffee at a newspaper office. (Trust me on that one.)
The path to the first cut keeps getting longer. September now looks like the earliest possibility, and even that's not guaranteed. Having tracked Powell's communications since he took the helm, I've noticed his increasing comfort with keeping rates higher for longer when conditions warrant.
Look, central banking is an inexact science in the best of times. It's downright maddening when you're dealing with the aftermath of a once-in-a-century pandemic that scrambled every economic model.
What's fascinating about this Fed is how they've evolved. Their embarrassing "transitory inflation" miss of 2021 seems to have instilled a healthy dose of humility. They're more patient now. More methodical. Less prone to declaring victory prematurely.
The inflation numbers tell the story. CPI has dropped from a scary 9.1% to a still-too-high 3.5%. The Fed's preferred measure – PCE inflation – stands at 2.7%, getting closer to their 2% target but... not... quite... there.
Why the hesitation to cut? It's all about asymmetric risk. If they ease too soon and inflation reignites, they've blown their hard-won credibility. If they wait a bit too long? The economy might grow slightly slower than optimal, but with unemployment still below 4%, that's a gamble they seem willing to take.
I spoke with several economists last week who generally agreed: the Fed sees little upside in rushing.
What's particularly odd about this hiking cycle is how well markets have handled it. Despite the most aggressive rate increases in decades, major indices keep hitting new highs. Either investors have tremendous faith in Powell's piloting skills, or there's simply nowhere else to put money. Probably some of both.
So what should we expect Wednesday? No rate change (duh), but the real action will be in the statement language and Powell's press conference. Will they acknowledge the substantial progress on inflation? Will they hint – even subtly – at potential cuts later this year?
The press conference is where things could get interesting. Powell has occasionally sent markets into tailspins with an unscripted comment or two. (His communications team probably keeps antacids handy during these events.)
My bet? We'll see a Fed that remains cautious but increasingly confident their restrictive policy is working as planned. They won't spike the football – central bankers save celebrations for their private moments – but the tone might shift ever so slightly toward optimism.
For now, the Fed has been either remarkably lucky or remarkably good. In economics, as in journalism, sometimes it's better to be lucky than good. But I suspect it's a bit of both.
