Countdown to the FOMC: How the Fed Could Surprise Investors Later Today

 

U.S. Economic Data Paints Mixed Picture, but Dovish Bias Persists Ahead of FOMC Decision

Introduction: Market Braces for Fed's Next Move

As investors await the Federal Reserve’s rate decision on May 7, 2025, a flurry of key U.S. economic data released over the past week offers critical insight into the direction of monetary policy. While certain indicators suggest ongoing economic resilience—particularly in services and job creation—other metrics point to moderating inflationary pressures and softening labor market dynamics. The overall macro picture continues to support a dovish policy stance, albeit with some nuances.

Friday’s Labor Market and Wage Data Set the Tone

On May 2, 2025, the U.S. released a batch of crucial labor market figures that laid the foundation for market expectations leading into this week. While the headline non-farm payroll number surprised to the upside, a deeper dive revealed important dovish signals.

Non-Farm Payrolls Beat, but Deceleration Evident

The U.S. economy added 177,000 jobs in April, exceeding the consensus estimate of 130,000. However, this figure marked a decline from the previous month’s 185,000, indicating a gradual cooling of hiring momentum. This type of slowdown is consistent with the Federal Reserve’s “soft landing” narrative—where growth moderates without tipping the economy into recession.

Unemployment Rate and Participation Remain Balanced

The unemployment rate held steady at 4.2%, matching both consensus and previous readings. More notably, the labor force participation rate ticked up to 62.6%, suggesting that more workers are entering the labor market. This rise in labor supply helps reduce upward wage pressures, which is a positive development from the Fed’s perspective.

Wage Growth Cools: A Dovish Signal

Both monthly (0.2%) and annual (3.8%) wage growth figures came in below expectations (0.3% and 3.9% respectively). These readings are perhaps the most dovish part of the report. The Federal Reserve has long flagged wage inflation as a key concern—particularly in the services sector, where labor costs are a major input. Cooling wage growth reduces the risk of persistent inflation and gives the Fed more flexibility to maintain or ease policy.

Factory Orders: Resilient, But Not Hawkish Enough

Factory orders surged 4.3% month-on-month in March, a robust rebound from the previous 0.5% increase. Although slightly below the 4.5% consensus, the data reflects strength in manufacturing demand. Still, this uptick must be weighed against broader weakness in manufacturing surveys (such as the ISM), which continue to show contraction. Overall, factory data adds a minor hawkish nuance but does not shift the core dovish narrative.

This Week’s Data Reinforces the Dovish Case—With Caveats

ISM Services PMI: Sector Resilience

On May 6, the ISM Services PMI for April came in at 51.6, beating both the previous reading of 50.8 and consensus of 50.6. This data shows that the services sector remains in expansion territory, supporting a picture of ongoing demand. A resilient services sector can pressure inflation via wage demands and pricing power, which leans hawkish. However, one strong report is unlikely to alter the broader policy stance without confirmation from inflation data.

Trade Balance: Widening Deficit Adds to Dovish Outlook

March’s trade deficit widened to -$140.5 billion, worse than the consensus forecast of -$137 billion. The increase in imports to $419 billion (up from $401.2 billion) outpaced the modest export growth to $278.5 billion, weighing on net GDP contributions. A larger trade deficit implies weaker domestic production relative to consumption, which typically eases inflationary pressure—a dovish factor in the Fed’s calculus.

API Crude Oil Stock: Inventory Draw Signals Upward Price Pressure

The American Petroleum Institute reported a crude oil stock draw of -4.49 million barrels for the week ending May 2, significantly higher than the expected -2.5 million. While bullish for oil prices, this could reignite inflation concerns, especially if sustained. Still, the Fed tends to treat oil-driven inflation as transitory unless it spills over into broader price dynamics.

Synthesizing the Data – Where Does the Fed Stand?

The Dovish Case Is Stronger

Taking both last Friday’s data and this week’s economic indicators into account, the dovish case holds more weight. The slowdown in wage growth, rising labor participation, and widening trade deficit all point toward waning inflationary pressures. While headline job growth and services activity suggest the economy remains resilient, they are not overheating—allowing the Fed to remain patient.

Hawkish Undercurrents Remain, But Are Contained

Two factors could give more hawkish Fed members a reason to push back:

1. Stronger-than-expected payrolls: While growth is slowing, the headline beat may suggest latent labor market strength.

2. Rising oil prices: If sustained, energy inflation could complicate the disinflationary narrative.

However, these are isolated data points rather than systemic signals. Without a corresponding rise in core inflation, the Fed is unlikely to pivot back to tightening.

Policy Implications – A "Hold" with a Watchful Eye

May 7 FOMC Meeting: No Cuts Expected

Markets have largely priced in that the Federal Reserve will hold rates steady at the May 7 FOMC meeting, with no rate cuts expected at this time. While recent data supports a more accommodative stance in the future, the Fed is unlikely to move preemptively without confirmation from inflation metrics. As such, the central bank is expected to adopt a wait-and-see approach, maintaining the current policy rate while emphasizing its data-dependent framework.

Tone: Cautiously Dovish

While the Fed may retain hawkish language to avoid over-stimulating markets, the underlying policy bias is shifting more dovishly. Chair Jerome Powell is likely to acknowledge the cooling wage data and emphasize the importance of upcoming inflation prints (CPI, PCE) before any decision on rate cuts.

Market Outlook – Risk Assets Benefit, But Eyes on CPI

The macro environment remains favorable for equities, particularly growth stocks and rate-sensitive sectors such as tech, real estate, and consumer discretionary. Bond yields, particularly on the long end, may continue to fall as rate cut probabilities increase.

However, this optimism hinges on continued disinflation. If upcoming CPI data surprises to the upside, markets could quickly reassess.

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Conclusion: Dovish Tilt, But Caution Remains

The economic data from April and early May suggests a U.S. economy that is cooling, not collapsing. For the Federal Reserve, this is an ideal backdrop to pause and assess. Slower wage growth and a loosening labor market reduce the need for further tightening, while moderate strength in services and hiring offer reassurance that a hard landing is not imminent.

Unless inflation reaccelerates, the Fed is increasingly likely to shift toward easing in the second half of 2025. For now, the data supports a dovish bias—and markets are taking note.

Reminder: All eyes will be on the Federal Reserve tonight at 1:00 AM WIB, when the FOMC announces its latest policy decision. While no change in interest rates is expected, markets will be highly sensitive to the Fed’s tone and guidance—especially during Chair Jerome Powell’s press conference. Investors should be prepared for potentially elevated market volatility, particularly in currencies, cryptos, commodities, bonds, and equities,  as even subtle shifts in language or projections could trigger sharp reactions.

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