It’s easy to criticize the Federal Reserve (The Fed). After all, Chairman Powell and his merry band of monetary mercenaries have one of the toughest jobs in all the land — balancing the plainly contradictory objectives of full employment on one hand and stable prices on the other. It’s a real conundrum — if they do too well on one side of their so-called dual mandate, the other is at risk.

Here’s what I mean: Say, for example, they run fast and loose with interest rates and the size of their balance sheet in such a way so as to prod the economy beyond full employment. The working public (and the White House) will be thrilled, but eventually, the labor market will probably overheat, and inflation will spike. On the other hand, if they tighten aggressively and crush inflation with impunity, they run the risk of squashing the labor market and causing unemployment to spike (and that would make nobody happy). That’s the conundrum the Fed faces day in and day out, no matter what the environment.

But when the backdrop is as wonky as it is today, it tends to place the Fed at a very awkward camera angle. And from the sidelines, it’s all too easy to kick and scream when things don’t turn out the way we think they should.

But what we forget when we indulge in this kind of behavior is that the experts — both on the hardwood and in the hard marble halls of the Fed — know exactly what they’re doing and are far more in command of the situation than we would be if we were in their sneakers. 

Still, sometimes the cameras catch an unforced error that makes it hard not to scream at the TV. I worry that Powell’s Fed made exactly such a mistake last week when he allowed the word “transitory” to be used to describe the inflationary pressures that seem to be building (or, at a minimum, influencing how consumers view the current state of the economy).

To be clear, I’m not taking issue with the decision to leave rates on hold or to slow the pace of quantitative tightening (both of which the Fed did on Wednesday, more or less in line with market expectations). I’m not even necessarily taking issue with the sentiment Powell expressed when, about halfway through Wednesday’s post-decision press conference, one of the reporters in the room got him to admit that the Fed’s base case scenario for the near-term implies that they’re viewing the latest surge in inflation expectations as “transitory.”¹

After all, he may well be right: The big surge in inflation expectations evident in consumer surveys like the University of Michigan’s or the Conference Board’s are so far built on an assumption that a) tariffs proposed by the Trump administration will stick, and b) that they will indeed be inflationary. Admittedly, as someone burdened by years of training in traditional economics, that feels correct. And we’re beginning to see hints of caustic inflation show up in pricing data themselves (at least assuming business surveys like the PMIs and regional Feds are more reliable than consumer surveys). But if experience teaches us anything, it’s that reality rarely follows the script written by textbooks or embraced by economic orthodoxy — it has the nasty habit of becoming unsterile and unpredictable. So ‘transitory’ may, in fact, eventually prove to be exactly the right way to describe what’s going on, and only time will tell.

But if I were in charge of public relations at the Fed, I would’ve still advised Powell to avoid the word at all costs, because 
“transitory” is the same sort of thinking that seriously damaged Fed credibility almost exactly four years ago as the economy was in the process of awakening from its post-COVID slumber. That’s when Fed Governor (and soon-to-be Fed Vice Chair) Lael Brainard endorsed the Fed’s company line in articulate form by saying “a surge in demand and any inflationary bottlenecks are likely to be transitory as fiscal tailwinds are likely to transition to headwinds sometime thereafter.”²

Of course, we all know how that turned out: Inflation proved to be anything but transitory and those fiscal tailwinds never really transitioned to headwinds at all. Fast forward to today, and we’re right back to “transitory” with a fiscal environment that is at least as un-knowable as it was in 2021. We should all be humble enough to defer to the experts and assume their play-calling is game-appropriate, but I sure hope they’re right, because I’m not sure Fed credibility would survive another unforced error — especially when the executives in the luxury box have already expressed a desire for a coaching change.

Meanwhile, the economy itself continues to send mixed messages of its own. At least some of this was obvious in the Fed’s own data, with last week’s release of the so-called Staff Economic Projections (or “SEPs” for short). In addition to a slightly less dovish dot-plot, the SEPs also envisioned a slowdown in growth, a more pronounced rise in unemployment and higher inflation than back in December, the last time we got a peek into how the Fed is viewing the economy.³

Predictably, the Conference Board’s Index of Leading Economic Indicators, or LEI, agreed, by eroding enough to once again trip the trigger on the Board’s own “recession warning.” Exactly half of the LEI’s 10 underlying components worsened last month, including consumer confidence (related to the above-mentioned spike in consumer inflation expectations) as well as big drop new order activity (perhaps a hangover from recent pre-buying associated with tariff expectations).⁴

Tuesday’s retail sales release was a little more mixed, with headline growth coming in at a much lower-than-expected 0.2%. Those looking for signs of a decline in discretionary spending can point to a 1.5% drop in restaurant and bar sales or a 0.4% slip in new cars to make their case, but a big surge in online buying runs somewhat counter to that conclusion. At the same time, so-called control group sales rose 1.0%, which directly feeds the Bureau of Economic Analysis’ estimate of GDP growth and should therefore help ease some of the pain associated with the impact on growth that a temporary surge in the U.S. trade deficit will very likely exert on first-quarter numbers.

But perhaps the best example of “mixed” came from the first salvo of regional Fed manufacturing data. The New York Fed’s Empire Manufacturing Index was a big disappointment, with a 26-point plunge in new order activity and rising inventories (more evidence of tariff pre-buying dropping out of the data?) joining a big increase in uncertainty to create a report that had a decidedly recession-y feel (and for what it’s worth, the NY Fed’s services version released the following day wasn’t much better.^5,6 On the other hand, things were considerably more upbeat just down I-95 where the Philly Fed surprised to the upside with employment rising to a multi-year high even as order activity and current production slowed.⁷

And finally, housing. Last week’s homebuilder survey from the National Association of Homebuilders wasn’t exactly encouraging as the number of would-be buyers who toured new housing developments dropped to levels rarely seen outside of recession or the pandemic. Builders’ reliance on discounting and incentives was largely unchanged too, even though mortgage rates have dropped by more than half a percent since New Year’s Day.⁸ On the other hand, markets actually seemed to catch a bid on Thursday after the National Association of Realtors reported a surge in existing home sales for February.⁹ While there are reasons to be skeptical that the momentum will continue, that’s a notable feat for a data point that rarely catches the attention of anyone other than market economists, let alone active traders.

So, I suppose that the bottom line to last week’s data is that all the mixed signals — from the Fed and elsewhere — has made forecasting the direction of the economy about as easy as filling out a NCAA bracket that isn’t totally busted by the end of Round Two. (Yeah, me too...)

What to watch this week

As is almost always the case, the week following a meeting of the Federal Open Market Committee will be dotted with appearances from various Fed (and former Fed) officials suddenly freed from the Fed’s self-imposed quiet period in the run-up to an interest rate decision. More than half a dozen members of the ‘federatti’ are scheduled to speak, but highlights include Governor Michael Barr on both Monday and Friday as well as Governor Adriana Kugler on Tuesday. As always, screen these appearances for any hint of dissention from the party line (which remains “we’re on hold because the economy is strong enough to allow us the luxury of being patient to see how all this ends”).

It’s a fairly busy week from a macroeconomic perspective, with two separate reads on consumer sentiment: The Conference Board’s version on Tuesday and the University of Michigan’s final March release on Friday. As the paragraphs above make clear, inflation expectations are perhaps the most significant components inside these releases these days — watch for any signs that consumers are becoming more (or less,) comfortable with the direction of prices at the consumer level.

I’d also spend a few minutes scanning Monday’s Purchasing Managers Index releases for any hints about the direction of prices at the enterprise level. If businesses are feeling the pinch from the Administration’s various tariff proposals, it’s a safe bet that at least some of it will reach down into Mr. and Mrs. America’s pocketbook (and therefore grab the Fed’s attention). Inflationary pressures were also evident in last week’s Empire Manufacturing and Philly Fed (discussed above), which makes Tuesday’s Richmond Fed and Thursday’s Kansas City Fed manufacturing reports worth a read as well.

Even though “Tariff Day” is still more than a week away (April 2^nd), many economists suspect that businesses have already begun pre-buying supplies to avoid price increases and other supply chain disruptions if and when the Administration’s various trade proposals become reality. Anecdotal evidence has already begun to show up in softer, survey-based data as well as last month’s import/export data. But if such behavior is truly widespread, it will eventually show up as inventory on the books. We’ll get advanced estimates of retail and wholesale inventories for February– as well as new trade balance figures – on Thursday.

We’ll also get the opportunity to validate or refute the relatively downbeat tone of last week’s Index of Leading Economic Indicators (or “LEI”, discussed above) when the Chicago Fed releases its version, the Chicago Fed National Activity Index. But maybe the most interesting single datapoint for those who are trying to pick a side in the newly reinvigorated recession debate in this week’s calendar comes on Friday, when the Bureau of Economic Analysis releases its income and outlays report. Like the Bureau of Labor Statistics’ non-farm payroll report, the BEA’s income and outlays release contains so much more than its headline data. This month, I’d focus on the savings rate: if it shows a noticeable spike higher, that would be solid evidence that consumers are perhaps as worried about the economy as their responses to consumer surveys conducted by the UofM and Conference Board suggest they are.