Have we ever seen Powell’s last tariff deduction as a Fed seat?
Chairman of Federal Reserve Jerome Powell explained on Wednesday that the tough US labor market is now the main determinant of monetary policy, a signal that a strong July work number can finish off all bets for slaughtering September interest rates and reducing the possibility of further easing this year.
At his press conference after the meeting of the Federal Open Market Committee on Wednesday, Powell insisted that the next step of the tariff determination agency would depend on the “totality” of incoming economic data. He acknowledged the case to alleviate, such as sauce in consumer expenditure, GDP growth was only 1.2% in the first half of this year, and reducing the risk of the job market from weakening the demand and labor supply.
But he hinted why The Fed maintains his rather strict attitude: “The main number that you should see today is the unemployment rate,” Powell told reporters.
The position of this company is very important considering that the Governor of Christopher Waller and Michelle Bowman chose to ease, the first time in more than 30 years that there were two differences of opinion at the Fed Policy Meeting.
But Powell has a point. The labor market is still widely balanced, thanks to a tighter immigration control limiting the entry of foreigners into the workforce. Other indicators such as stop work and opening rates also survive well. Plus, the unemployment rate is only 4.1% almost not justifying interest rates.
Early Market Reaction – Retreating on Wall Street, Increased Bond Results, Surgery of Dollars and Further Cooling from Tariff Betting on Money Market – shows that investors hear a hard and clear powell message.
Futures market level now shows that the probability of cutting a quarter point in September is basically a coin throw, the price is at least dovish in more than a year. Only one level of level at the end of this year is fully valued.
Steven Englander, Head of Global G10 FX Research in Standard Chartered, said it was difficult to debate with market interpretations based on powell tones.
“Powell is quite clear that he binds himself with unemployment,” Englander said.
The full tile job
The resilience of the labor market shows why the financial markets once again exaggerate Fed’s appetite to subside.
The unemployment rate has anchored at 4.0-4.2% for more than a year. It is historically low, and as Powell said, basically shows the economy runs with full work. As long as it still happens, it will be difficult to justify the rate of cutting, even if the balance is increasingly dangerous because of the “double slowdown” supply and demand for labor, as Mike Reid RBC said.
And we must not ignore inflation, which can also be said to guarantee the policy attitude of the “simple” restriction of Powell. Annual inflation runs “rather” above the 2% Fed target, according to Powell, with CPI core at 2.9% and PCE core of 2.8%.
And with bait from tariffs that have not been fully felt, the risk of price is leaning to the top side. Powell assumed that the tariff must represent the price increase once, but he admitted that no one could be sure. If the new born creep in the price of goods remains, Fed might feel that you have to wait to alleviate the policy until the impact will subside. And that might not be until next year.
At the peak of the chaos of the post-liberation day in early April, traders gave a price of more than 130 basis of easing points this year. And only one month ago, they expect around 70 BPS cutting after the end of the year, but it now drops to around 35 bps.
Seeing further, only 65 BPS easing is valued to the futures curve in May next year when Powell’s term as a Fed seat ends. Can Powell lead his last interest rate cut as a Fed chair? That is impossible, but of course it’s not impossible.
Source: Reuters
