The Fed (and the World) Awaiting U.S. Economic Reports

In the next two to three weeks, several economic indicators summarizing the prior month (April 2025) will be released to the public. This reporting process has been going on for decades, and financial institutions, investors, and the Federal Reserve often use the indicators. What makes next month’s reports so compelling and critical is that the data will show the effects of President Trump's tariffs and signal the economy's direction, specifically whether we are heading for a recession.

Economic indicators are statistics measuring economic activity. The data is analyzed to help predict future activity. The following are a few of the critical indicators that will be paid great attention to:
April 30 - Gross Domestic Product (GDP)
April 30 -  Consumer Spending
May 2  - U.S. Unemployment Rate
May 13 - Consumer Price Index

Some of the main areas the Fed will be analyzing as a result of the reports:

Inflation

It is hard to imagine that the measure of inflation, the Consumer Price Index, will display anything other than general price increases, considering the extent and amount of tariffs' effect on the global economy. If April’s report does not fully demonstrate the impact, the following month's reports will most certainly reflect higher prices for almost everything if the tariff issue is not resolved.

Employment

I expect the labor market to be in a “wait and see” mode. If the indicators next month confirm reduced consumer spending and higher unemployment, we should see the beginning of increased layoffs, with the corresponding decrease in productivity, which will impact economic growth. If the unemployment rate drops and spending and prices rise, pressure will be on the Fed to do nothing or increase interest rates (see below). The weekly jobless claims report will receive greater attention than the monthly reports since there will be a lag between actual and reported numbers.

Spending

Spending will be one of the most critical indicators next month since consumer demand makes up two-thirds of economic growth. Inflation may show little or no increases, but spending may be reduced because of lower consumer sentiment, confidence, and commitment to reduce spending during this tariff mess.

Interest Rates

The Federal Reserve meets on May 6th and 7th to determine their next monetary policy move. The April inflation report by the Consumer Price Index will not be released until a week later, on May 13, 2025. Other available price data will be analyzed, and they will have the following choices:

1)      Increase interest rates to combat higher inflation—Unlikely. If prices rise, it will not be because of traditional factors such as increasing income, spending, and productivity; it will be because of a man-made obstruction to free trade—tariffs. Increasing the Fed funds rate would slow down the current level of economic activity even further.

2)      Do nothing—This is the probable action unless the economic indicators show a real slowdown in spending, prices, and productivity. I believe the Fed’s position will be to avoid an impulsive reaction and continue to hope that the cause of the tariff issues is temporary and will be resolved soon.

3)      Lower interest rates to give a “boost” to the economy. Before the tariff, inflation was at 2.4% annual (past twelve months), and unemployment was inching a bit higher—both would be favorable factors to begin lowering rates, which could jumpstart the housing industry as mortgage rates would decline. However, if tariffs remain in place, the increased construction and housing costs may outweigh the benefits of a slight rate reduction, and buyers will remain on the sidelines. The Federal Reserve will have a challenge maneuvering through a potential global financial crisis and the increasing political pressure to lower rates. 

 For the most part, investors trust the capital markets to be efficient and reward them for the risk they accept, free of unnecessary obstacles. An overwhelming body of evidence supports the risk/return relationship of investing in various asset classes. One of the reasons the market has remained efficient over time is because of no external intrusions by individuals or governments other than the uncertain expectations of tomorrow. However, the current economic situation is unprecedented, and it requires a source of reliable and trusted advice. Reviewing your financial plans to ensure you are positioned to take advantage of changing market conditions that could alter your future goals would be worth your time. Please call me at (925) 484-1671 or anthony@carrwealth.com if you have questions or want to schedule a no-charge consultation and portfolio review.

Thank you.