Fed Officials Weigh Mixed Economic Signals, Rising Geopolitical Risks at Policy Meeting
Federal Reserve policymakers convened on Tuesday amid fresh data that may reinforce concerns that the Trump administration’s policies—or at least the uncertainty they create—could slow economic growth in the months ahead.
Just before the start of the Fed’s two-day meeting, the U.S. Commerce Department reported a 0.9% drop in retail sales for May—worse than the 0.7% decline forecasted by economists and the largest decline in four months. The Fed’s own report later showed a surprise contraction in industrial production for the same period.
However, the data offered a mixed picture. April retail sales were revised downward slightly, but economist Bradley Saunders of Capital Economics pointed out that the decline was driven by weaker auto sales following a surge earlier in the year, likely tied to concerns over impending auto tariffs. Bad weather may also have been a factor. He noted that broader consumption trends remain solid.
On the production front, a 0.2% decline in industrial output pulled capacity utilization down to 77.4%—its lowest level since January. Additionally, a separate survey revealed that U.S. homebuilder confidence dropped to its lowest in two and a half years, with demand dampened by high borrowing costs—partly a result of the Fed’s cautious stance on interest rates.
Despite muted inflation readings, the central bank remains concerned about inflation risks tied to rising tariffs. The Fed continues to aim for 2% inflation, down from the surge seen post-COVID. Tariff-driven price pressures are still anticipated.
A major dilemma for the Fed lies in balancing the risk of economic slowdown against potential inflation. President Trump’s final trade policy direction remains unclear, with many tariffs proposed but not yet implemented, and several trade agreements still pending. This uncertainty clouds the Fed’s decision-making.
Adding to the complexity, escalating conflict between Israel and Iran has driven oil prices higher—posing another potential inflationary threat. The geopolitical tensions have increased caution among Fed officials as they prepare to issue an updated policy statement and economic forecasts on Wednesday.
James Knightley of ING noted that the May retail data, unadjusted for inflation, suggests real consumption may be even weaker than it appears. Concerns about job prospects and higher prices due to tariffs have eroded consumer confidence, which could cool spending further in the year ahead.
The Fed is widely expected to keep its benchmark interest rate in the 4.25%-4.50% range. Officials are unlikely to offer clear forward guidance until the impact of Trump’s tariffs becomes clearer—whether they drive inflation, undercut growth, or, as the administration insists, support stable growth with falling prices. Trump has called for immediate rate cuts, but the Fed remains cautious.
The Israel-Iran conflict has only added to the Fed’s uncertainty, with rising oil prices introducing new inflation risks. Since returning to office in January, Trump’s aggressive trade moves—unexpected by many—have created what the Fed describes as a deeply uncertain policy environment.
Many economists believe these policies could produce a stagflationary scenario: slower growth alongside higher prices. The Fed’s policy path—whether to cut rates or maintain current levels—depends on which challenge proves more dominant.
At 2 p.m. EDT on Wednesday, the Fed will release its policy decision and economic projections, followed by a press conference with Chair Jerome Powell. More attention may go to the Fed’s updated “Summary of Economic Projections” than the rate decision itself, as investors seek insight into how the Fed’s outlook has shifted since March—before Trump expanded tariff threats but also delayed some of the most aggressive measures due to market backlash.
Back in March, the Fed had slightly lowered its growth forecast and raised inflation expectations, while keeping its projection for two rate cuts unchanged. However, analysts now expect a more hawkish stance, with a potentially reduced number of rate cuts in light of mounting inflation concerns.
JP Morgan’s Michael Feroli wrote that Trump’s trade policies likely prompted “significant” changes to Fed forecasts—toward both slower growth and higher inflation. “These stagflationary shifts may not clearly alter the rate outlook,” he said, “but we expect a modestly hawkish adjustment, likely showing just one rate cut this year.”
