The financial market hawks were quickly subdued with Federal Reserve Chair Jerome Powell’s post-meeting words this week. Following the two-day FOMC meeting, Powell clearly downplayed any chance of an interest rate hike this year and suggested there could be a cut by year end. Recent inflation reports, since the beginning of the year, have shown the decline in inflation has stalled, convincing the committee it will take longer to reach its 2% inflation target. Keep in mind, the quarterly Summary of Economic Projections doesn’t even predict inflation getting close to 2% until the end of 2025 at the earliest.

Powell was peppered with questions from reporters about the viability of the current monetary policy – whether it is working and is restrictive enough (or too much) – as well as what it will take for the Fed to make its next move. The Chair, in his usual very direct manner, answered with firmness that the current restrictive policy is appropriate for now but stands ready to adjust if there is any sign of severe weakness in the labor market. Powell rejected the notion that the economy is entering a period of stagflation by reminding us the last such period was surrounded by 10% unemployment and high single-digit inflation – neither of which is happening. In other words, Powell doesn’t “see the stag or the flation” at this time.

In the end, higher-for-longer seems to be the mantra. The financial markets clearly woke up on the wrong side of bed this week, expecting the worse and driving Treasury yields to the highest level in five months. Powell and company soothed the doomsayers who are finally content with rates where they are. If a rate cut happens before December, all the better. If not, that is okay also.

Jobs – The April job report seems to have been written for the Fed. The U.S. added the fewest jobs in six months (175,000), the unemployment rate inched up closer to 4% (3.9%) and average hourly earnings year-over-year fell a tenth of a percent to the lowest level since June 2021 (3.9%). The totality of the report is what the Fed wants – moderating job growth accompanied by moderating wage gains. More than half the job growth in April came from health care and education, followed by gains in the trade and transportation sector. Manufacturing added jobs after five months of decline. The disparity of job growth suggests there is more weakness in the labor market than the headline number suggests, but one month does not tell the complete story. Fed committee members can sleep a bit more comfortably now that they are one tiny step closer to fulfilling their goal and restoring economic stability.