Is the Fed still in a 'good place'?: McGeever

ORLANDO, Florida: At the Federal Open Market Committee meeting next week, investors will scrutinize all communications for any sign that the recent softening in U.S. inflation could be enough to nudge policymakers closer to cutting interest rates.
Current economic data might be leaning in that direction, but policy out of Washington could well keep Chair Jerome Powell and colleagues in 'wait and see' mode.
No one expects the Fed to cut rates next week, but businesses, households and investors should get a better sense of policymakers' future plans from the revised quarterly Staff Economic Projections and Powell's press conference.
Powell was very clear in his post-meeting press conference last month that the Fed is prepared to take its time assessing the incoming economic data, particularly the impact of tariffs, before deciding on its next step.
He told reporters no less than eight times that policy is in a "good place" and said four times that the Fed is "well positioned" to face the challenges ahead. Will he change his tune next Wednesday?
Annual PCE inflation in April was 2.1%, the lowest in four years and virtually at the Fed's 2% target, while CPI inflation in May was also lower than expected. The labor market is softening, economic activity is slowing, and recent red-hot consumer inflation expectations are now starting to come down.
In that light, it may be surprising that markets are not fully pricing in a quarter-point rate cut until October.
"The upcoming meeting offers an opportunity (for Fed officials) to signal that the recent mix of tamer inflation and softer consumption growth warrant a careful 'recalibration' of rates lower, while remaining very cautious about what comes next," economist Phil Suttle wrote on Wednesday.
But there are two well-known barriers that could keep the Fed from quickly re-joining the ranks of rate-cutting central banks: tariffs and the U.S. fiscal outlook.
WASHINGTON WILD CARD
Tariffs have yet to show up in consumer prices, especially in goods, and no one knows how inflationary they will be. They could simply result in a one-off price hit, they could trigger longer-lasting price spikes, or the inflationary impact could end up being limited if companies absorb a lot of the price increases. In other words, everything is on the table.
Equity investors appear to be pretty sanguine about it all, hauling the S&P 500 back near its all-time high. But Powell and colleagues may be slower to lower their guard, and for good reason.
Although import duties on goods from China will be lower than feared a few months ago and Washington is expected to seal more trade deals in the coming weeks, overall tariffs will still end up being significantly higher than they were at the end of last year, probably the highest since the 1930s.
Economists at Goldman Sachs reckon U.S. inflation will rise to near 4% later this year, with tariffs accounting for around half of that. This makes the U.S. an "important exception" among industrialized economies, the OECD said last week.
The other major concern is the U.S. public finances. President Trump's 'big beautiful bill' being debated in congress is expected to add $2.4 trillion to the federal debt over the next decade, and many economists expect the budget deficit will hover around 7% of GDP for years.
With fiscal policy so loose, Fed officials may be reluctant to signal a readiness to loosen monetary policy, especially if there is no pressing need to do so.
FOMC members in December last changed their median forecasts for the central bank's policy rate, hiking it this year and next year by a hefty 50 basis points to 3.9% and 3.4%, respectively. They left projections unchanged in March amid the tariff fog.
That implies 50 basis points of rate cuts this year and another 50 bps next year, which is pretty much in line with rates futures markets right now. So perhaps Fed policy is still in a "good place", but with economic expectations changing quickly, it's unclear how long that will be the case.
(The opinions expressed here are those of the author, a columnist for Reuters)
Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X.
(Editing by Andrew Heavens)

Try Our AI Features

Explore what Daily8 AI can do for you:

Learn with AIFact CheckingText to SpeechAI Summary

Related Articles

The National

7 hours ago

• The National

US rate cuts could come as soon as July, Fed official says

A senior official at the Federal Reserve has suggested that the US central bank should consider cutting interest rates as soon as next month. 'We could do this as early as July,' Fed Governor Christopher Waller said on CNBC. 'That would be my view, whether the committee would go along with it or not.' As a governor on the Federal Reserve Board, Mr Waller holds a permanent vote on the central bank's rate-setting Federal Open Market Committee. Mr Waller and other Fed officials unanimously voted to hold interest rates steady between 4.25 and 4.50 per cent on Wednesday. The Central Bank of the UAE, which follows Fed decisions because of the dollar peg, also held rates steady following the US central bank's decision. Fed officials this week also maintained their forecast for two quarter-point cuts this year before slowing the pace of cuts in 2026. Several officials projected zero rate cuts, pointing to some uncertainty on the future policy path. The central bank has not adjusted interest rates in its last four meetings, largely due to the uncertainty surrounding tariffs. But Mr Waller said the Fed can 'look through' their inflation impact, arguing tariffs would create a one-time inflation bump rather than persistent high prices. Fed Chair Jerome Powell on Wednesday said tariffs could either have a one-off or persistent effect on inflation. Asked by reporters why not cut interest rates this month, Mr Powell said he expected to see 'meaningful' inflation in the coming months. Data shows that the Fed's preferred inflation metric has decelerated for three consecutive months. The PCE (Personal Consumption Expenditures) Price Index rose 2.1 per cent annually last month, one-tenth of a percentage point above the Fed's long-term target. 'The data the last few months has been showing that trend inflation is looking pretty good,' Mr Waller said. He suggested that, if the Fed were to begin cutting rates in July, it should begin slowly. 'But start the process,' Mr Waller suggested. 'That's the key thing. And then if there's some big shock due to maybe the Middle East conflict, we can pause.' Mr Waller added that he is also concerned about the jobs market. While the unemployment rate has remained stable at around 4.2 per cent, Mr Waller said he was concerned about fewer jobs being created. The four-week average of jobless claims is at its highest level since August 2023, according to data from the Labour Department. 'Why do we want to wait until we actually see it crash before we start cutting rates?' he added. 'So I'm all in favour of saying maybe we should start thinking about cutting the policy rate at the next meeting, because we don't want to wait till the job market tanks before we start cutting the policy rate.' The Fed holds its next two-day meeting from July 29 to 30.

Zawya

8 hours ago

• Zawya

Audi could build plant in US to placate Trump, Spiegel reports

Volkswagen's premium brand Audi could build a plant at a new location in the United States under scenarios being considered to placate President Donald Trump in the tariff conflict, the Spiegel news magazine reported on Friday. Audi is considering building a plant in the southern U.S., which would be the more expensive option out of a number of scenarios being considered, with company sources estimating costs of up to 4 billion euros ($4.6 billion), the report said. An Audi spokesperson said that the company aims to build up more of a presence in the United States. "We are currently examining various scenarios for this. We are confident that we will make a decision this year in consultation with the (Volkswagen) group on how this will look in concrete terms," she said in an emailed statement, reaffirming earlier comments made by the company. Audi has no production of its own in the U.S., but Volkswagen has a plant in Chattanooga, Tennessee and one under construction near Columbia, South Carolina. Trump's announcement of sweeping tariffs has already racked up hundreds of millions of euros in costs for German carmakers heavily reliant on their export business, according to an industry representative. BMW, Mercedes-Benz and Volkswagen are in talks with Washington over a possible import tariff deal , seeking to use their U.S. investments and exports as leverage to soften any blow, sources have told Reuters. ($1 = 0.8678 euros)

Zawya

9 hours ago

• Zawya

Wall St futures edge lower as Middle East war enters second week

Wall Street stock index futures edged lower on Friday as investors assessed comments on U.S. military involvement in the Middle East conflict, and Federal Reserve Chair Jerome Powell's warning on rising inflation ahead. As the fatal aerial war between Israel and Iran approached its second week, the White House said on Thursday President Donald Trump will decide in the next two weeks whether the U.S. will get involved on Israel's side. "While the immediate prospect of a U.S. intervention in Iran may have diminished, the fact this is reportedly a two-week hiatus means it will remain a live issue for the markets going into next week," Dan Coatsworth, investment analyst at AJ Bell, said in an email. The oil price volatility triggered by the Middle East conflict has also added on to concerns around tariff-based price pressures in the United States. The Fed, expected to balance the risk of slowing growth and higher inflation, kept interest rates unchanged on Wednesday, in line with market expectations. Policymakers, however, cautioned about inflation picking up pace over the summer as the economic effects of steep import tariffs kick in. Money market moves show traders are pricing in about 47 basis points of rate cuts by the end of 2025, with a 59% chance of a 25-bps rate cut in September, according to CME Group's FedWatch tool. At 05:37 a.m. ET, Dow E-minis were down 105 points, or 0.25%, S&P 500 E-minis were down 16.75 points, or 0.28%, and Nasdaq 100 E-minis were down 67.5 points, or 0.31% The S&P 500 and the Nasdaq are set for weekly gains, while the blue-chip Dow is on track for mild weekly declines. Crypto stocks rose in premarket trade as bitcoin prices soared nearly 2%. Coinbase Global was up 1.8%, and Strategy gained 1.1%. Shares of Tesla gained 1.2% among megacap stocks. Supermarket operator Kroger Co gained nearly 1% ahead of quarterly results due before the opening bell. Stablecoin issuer Circle extended gains from its previous session, with shares last up 12.6%. Wall Street's strong gains last month, primarily driven by a softening in Trump's trade stance and strength in corporate earnings, had pushed the benchmark S&P 500 index close to its record peaks before the ongoing conflict in the Middle East made investors risk-averse. The S&P 500 index stood nearly 3% below its record level, and the tech-heavy Nasdaq remained 3.3% lower. Philadelphia Fed business outlook data for June is scheduled at 08:30 a.m. ET. (Reporting by Kanchana Chakravarty in Bengaluru; Editing by Devika Syamnath)