New Policy Report: Fed has Bad News for Congress
In a report released on Friday, the Fed provided a monetary policy update to congress, highlighting its perspective on keeping rates constant and its outlook on the future of the economy. The report comes after the Federal Open Market Committee (FOMC) kept its federal-funds-rate target locked at 4¼ %–4½ % for a sixth straight meeting on June 18th, insisting it is “well positioned to wait for more clarity on the outlook for inflation and economic activity.” Investors, however, are reading the pause as a prelude: futures now price in more than 100 basis points of easing by the end of 2026, pinning the effective rate near 3.3 %. The disconnect between the Fed’s studious patience and Wall Street’s conviction helped propel spot gold to a fresh record of $3,372 an ounce on Friday, reinforcing the sense that hard assets remain in vogue even after two years of nominal “tightening.”
To be sure, consumer inflation has cooled from last year’s peaks, yet it still overshoots the target. Headline PCE (personal-consumption-expenditures) prices rose 2.1 % in the 12 months to April, while the stickier core gauge clocked in at 2.5 %. Real-world anxieties persist. Household and business sentiment indices have rolled over this year amid worries that the White House’s new tariff package will rekindle price pressures just as hiring slows. Non-farm payrolls are averaging only 124,000 new jobs a month, and the unemployment rate has been stuck at 4.2 % since February—hardly crisis territory, but notably higher than last summer.
Growth is wobbling as well. First-quarter real GDP contracted at an annualized –0.2 %, dragged under by a 43 % surge in imports placed ahead of the tariff hikes. Fed staff noted the buying binge swelled the trade gap to 5.2 % of GDP and likely understated output because inventories were under-counted, yet even so, private-domestic final demand managed a respectable 2.5 % gain. The mixed picture leaves policymakers in a bind: press harder and risk a recession, or loosen prematurely and court another inflation flare-up.
Despite lip service to restraint, the Fed continues to dilute its posture. In March it slowed quantitative tightening; since April only $5 billion of Treasuries and up to $35 billion of agency mortgage-backed securities roll off each month. The balance sheet has shrunk more than $2 trillion since mid-2022—but it is still over twice its pre-pandemic size. Meanwhile, Treasury real yields have fallen even as short-term inflation compensation edges higher, nudging two-, five- and ten-year nominal yields modestly lower since January. Easy money by another name?
Credit channels are flashing amber. Commercial banks’ core loan books are expanding at just a 2.2 % annualized clip, and surveys show lending standards remain tight for small firms and lower-score households. The FOMC’s own June projections concede as much, penciling in only 1.4 % real-GDP growth and 3 % headline inflation for 2025, with unemployment drifting to 4.5 % even if the funds rate drops to 3.9 %. Still, the committee repeats its mantra: “The FOMC is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective,” while cautioning that downside risks to growth remain “elevated.”
For savers anxious about a wobbly growth-inflation mix, the message seems clear. The Fed can pause, pivot, or fine-tune its models, but the underlying dollar supply keeps swelling and policy aims to tolerate prices “around” 3 % for years. No wonder gold’s latest breakout barely paused for breath. Sound money may be old-fashioned, yet in uncertain times it never quite goes out of style.
