Why the Fed will hold rates still

Too early to move. In any direction. The April meeting of the Federal Reserve does not expect any surprises: many governors have expressed themselves in favour of keeping Fed Funds Rates at 3.50-3.75%. The March projections, after all, pointed to a median of 3.375% by the end of the year (i.e. (3.25-2.50%), corresponding to only one rate cut between now and December. Uncertainties about the Gulf War, about the possibility of opening not only the Strait of Hormuz in time, but oil extraction and refining are weighing on the outlook, and it is very clear how rising fuel prices alone can quickly spread to all prices, creating real inflation, often associated with a recession: according to a well-known purely empirical analysis, all US recessions have been preceded by a rise in the cost of energy.

Rising oil prices may confront central bankers with a difficult dilemma: raising rates curbs inflation but also squeezes growth, and vice versa. At the moment, between investments in AI, defence, and the same increases in crude oil (the US is a net exporter), there do not seem to be any immediate problems on the employment front. Rather, it is inflation that may be a concern. The data on the Pce index are not very fresh: they stop in February and only on 30 April will the March data be known. At the moment, the index is up 2.8% (core inflation 3.0%), levels from which it does not seem to want to disengage.

More delicate, but still not decisive, is the situation of inflation expectations, which are pointing upwards. While inflation rate swaps remained close to 2.26%, five-year break even - relatively volatile at this time - rose to 2.62%, and 10-year break even rose to 2.44%, the highest since August 2025. Expectations measured through surveys by the University of Michigan rose slightly to 3.8% in March (but were at 4% in January).

The Cleveland Fed's nowcasting measures now point to Pce inflation of 3.6 per cent for April and 3.39 per cent for May, with core at 3.17 per cent and 3.10 per cent, respectively: these are structurally provisional figures, but they are significantly higher than the latest official readings. The Atlanta Fed dashboard - which indicates the underlying price pressures - actually shows a much better situation for overall and core inflation than a few months ago, even though only one indicator of the 18 available is now in the range considered 'normal'. What really matters, however, is more the uncertainty of the future than the current price pressures.

The situation in the labour market is not entirely reassuring: Chairman Jerome Powell - who ends his presidency in May but could remain on the board - has repeatedly warned that the apparent stability actually hides a parallel reduction in demand for labour, from companies in difficulty, and in labour supply, due to the reduction and reversal of immigrant flows. This is not a problem that can be solved with the tools of monetary policy, which at this stage can only focus on inflation, in an attempt to find the right moment to really intervene by minimising the damage or, alternatively, the end of the military crisis.