Despite holding steady on interest rates, the Federal Reserve’s recent announcement unveiled a nuanced picture of the U.S. economy, marked by internal disagreements and a subtle admission of economic moderation.
Notably, two Federal Reserve appointees advocated for an immediate 25 basis point rate cut, citing concerns over recent weaknesses observed in the jobs market. This dissent emerged amidst persistent calls for lower interest rates from President Trump.
Conversely, Chair Powell adopted a more cautious stance, suggesting the Fed was deliberately “looking through” potential tariff-induced inflation by maintaining current rates. The broader committee largely aligned with this view, supported by recent firmer-than-expected jobs figures and an above-consensus GDP print.
In a significant update to its press release, the Federal Open Market Committee acknowledged that “recent indicators suggest that growth of economic activity moderated in the first half of the year.” Despite this, they emphasized a low unemployment rate and “somewhat elevated” inflation, aiming to avoid past criticisms regarding “transitory” inflation predictions.
During the subsequent press conference, Chair Powell reiterated that the US economy remained in a “solid” position despite ongoing uncertainty, projecting that the inflationary impact from tariffs would likely be “short-lived.” He concluded that a “modestly restrictive” policy stance remained appropriate for the current economic climate.
Market sentiment, initially pricing in a significant likelihood of a September rate cut, adjusted sharply after Powell’s remarks, reducing expectations for both near-term and year-end easing. While a September adjustment remains a possibility, the Fed’s reliance on forthcoming inflation and jobs data, particularly the unemployment rate, makes an immediate move less probable.
Consequently, many analysts now anticipate December as the more probable starting point for a rate cut, potentially a more substantial 50 basis point reduction, should evidence of weaker employment and GDP growth materialize as expected. This approach echoes the Federal Reserve’s cautious strategy in 2024, waiting for clear signals before committing to a lower interest rate environment.
For dollar bears, the meeting offered minimal comfort, with the EUR/USD bounce stalling and the yield curve exhibiting a bearish flattening, typically a dollar-positive indicator. This suggests investors are recalibrating their expectations for the magnitude of the easing cycle, given the Fed’s stance on maintaining a “modestly restrictive” policy.
The coming days remain crucial, with upcoming economic reports, including the June core PCE deflator and a key jobs report, poised to influence future policy decisions. The impending August 1st tariff deadline also looms large, suggesting continued volatility and the potential for the market to further price out remaining easing expectations.
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