1. The Fed has maintained its target range for interest rates at 4.25%-4.50%. However, it announced a slowdown in the reduction of its Treasury holdings, from $25 billion to $5 billion per month, while keeping the pace of reductions in MBS holdings unchanged at $35 billion per month. J. Powell justified this slowdown by pointing to monetary tensions that have emerged particularly at the end of each quarter, suggesting that the balance sheet is approaching its target size (Charts 1 & 2).

2. In addition, the Fed has revised its 2025 growth forecast downward by 0.4% and raised its core inflation projection by almost as much (+0.3%). This "scissor effect" allows it to maintain its central scenario of two rate cuts in 2025. However, in its communication, the Fed placed more emphasis on employment than on inflation:
a. For almost all central bankers, the risks are now tilted to the downside for growth and to the upside for unemployment. The Fed noted it is “closely watching signs of labor market weakness” as well as financial conditions (implicitly referring to equity markets).
b. In the press conference, J. Powell emphasized that the increase in tariffs will, in principle, have a transitory effect on inflation. More importantly, he downplayed the recent rise in inflation expectations from the University of Michigan survey (Chart 3).

3. J. Powell’s main message is that uncertainty is extremely high, and it is urgent to wait and gain more visibility before adjusting monetary policy. But what exactly is the Fed waiting for? Powell clearly downplayed the importance of surveys (soft data), which have recently been too pessimistic compared to actual conditions. The Fed will adjust its monetary policy only in response to real data (hard data). Based on Powell’s comments during the press conference, we believe the key indicators the Fed will give extra weight to in the coming weeks are:

a. On employment, the balance between layoffs and hires in the JOLT Report (Chart 4), with a particular focus on the layoff rate, since an increase could "quickly translate into a rise in the unemployment rate." The Fed will also pay close attention to the monthly Employment Reports and weekly jobless claims. We estimate the threshold for job creation/destruction to be around 270K (Chart 5).
b. On inflation, the most relevant data point is the evolution of goods prices, which is expected to reflect the impact of the recent tariff hikes (Chart 6).

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