I thought Federal Reserve Chairman Jerome Powell would begin to acknowledge economic weakness at the FOMC meeting yesterday given all the deterioration I wrote about on Tuesday, but he didn’t — at all. Jeffrey Rosenberg of Blackrock aptly said the Fed is in ‘nothing to see here’ mode. Powell’s response to the question of economic weakness was encapsulated in an exchange with Christopher Rugaber of the Associated Press,

Rugaber: There is an argument out there in favor of cutting rates more immediately, inflation has continued to cool to roughly 2% despite the tariffs and I guess I also wanted to ask about cracks in the job market with gross hiring slowing, concentrated in just a few industries. We’ve seen some housing data, including this morning, that are pretty weak. Do you see any concerns that the economy is weakening and that is a reason to cut rates going forward?

Powell: So, we do of course monitor all of those things. I think if you look at the overall picture, you know what you’re seeing is 4.2% unemployment and an economy that is growing at a rate, hard to know, given the unusual flows in the first quarter, but it appears to be one and a half, two percent, maybe a little better than that. Sentiment has come up off of its very low levels, but still depressed. So, you can point to things, the housing market is a longer-run problem and also a short-run problem. I don’t think it is indicative of…you know, basically the situation is that we have a longer-run shortage of housing and we also have high rates right now. I think the best thing we can do for the housing market is to restore price stability in a sustainable way and create a strong labor market and that’s the best thing we can do for the housing market. You asked about the job market. Again, look at labor force participation, look at wages, look at job creation, they are all at healthy levels now. I would say that you can see, perhaps, a very, very slow continued cooling, but nothing that is troubling at this time. You know, we watch it very, very carefully, so overall, again, the current stance of monetary policy leaves us well positioned to respond in a timely way to economic developments…for now, and we will be watching the data carefully.

Powell is avoiding many things with that answer such as retail sales, jobless claims, the unemployment rate rising, and ISM surveys, or all summed together, the LDEI level below. Ultimately, what drives the FOMC’s inability to acknowledge weakness is the pervasive view among economists that significant tariff inflation is ahead. Powell said later on,

…what we’re waiting for to reduce rates is to understand what will happen with the tariff inflation. And there’s a lot of uncertainty about that. Every forecaster you can name who is a professional forecaster with adequate resources and forecasts for a living is forecasting — everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs.

Count me among those questioning if tariff inflation will ever show up meaningfully in consumer prices given a weak economic climate, difficulty to pass-through prices to the consumer without loss of demand, and the relatively small portion of spending on imported goods (11%). But, what is more important than if tariff inflation will show up or not, is if a recession is beginning to happen. The rapid onset of housing, consumer, and labor weakness in the last few months, paired with the classic set-up for a recession (yield curve, unemployment rate rising, Leading Economic Index weak, 5 years since the last one, tariff economic shock), make it seem likely. In four of the 11 recessions since 1950 (more than a third), the Fed cut rates through a bout of stagflation (including 2008) because economic weakness outweighed the inflation flare-up (see second section of Catalyst, not the cause for charts) and the Fed rightly made the decision that demand destruction of the recession would eliminate inflation in the future. There is no particular reason why the Fed cannot do the same thing now with a cyclical view (and why Trump is so fired up), other than a high-sensitivity to not making a second inflation mistake after waiting too long to raise rates after COVID-19. A different Fed Chairman (and FOMC) without that black mark on their records may not have the same attitude.

It all adds up to the Fed being willfully behind the curve which is going to exacerbate the downside of the economic cycle ahead and create more Fed cuts later to balance the cuts not being made now. Interestingly, the Summary of Economic Projections (SEP) showed that two FOMC members still think rates will be cut three more times this year over four meetings and two think inflation will remain under 2.8% by the end of the year (Powell hinted those are the same two), suggesting a small contingent seeing economic weakness. The LDEI made another new cycle low yesterday (-33.8) after weak housing starts and building permits showing economic weakness exceeding the prior two recession scares (12/23 and 08/24) and rivaling the economic conditions at the start of the 2001 or 2007 recessions (red arrows and dotted line in chart below). In other words, economic weakness is beyond a subjective opinion.