Pushing back
The Federal Reserve delivered its latest monetary policy decision yesterday evening. As was widely expected, the Fed kept rates on hold in their current band of 4.25-4.5%. This does not mean that there were not any fireworks during the publication and subsequent press conference. There were two dissenting votes to the decision to keep rates on hold. Two votes to immediately cut interest rates by 0.25% came from Trump‘s two recent nominees to the Fed. These two members have actively spoken about siding with Trump’s current narrative, highlighting declining economic activity.
Following the publication of this decision EUR/USD spiked back to 1.15. It wasn’t until Jay Powell’s press conference was underway that EUR/USD was able to continue its slide lower. Powell, in comments that may be seen as incendiary from the White House, seemed to stoke the embers of the President’s recent attack on the Fed and its chair. Powell suggested that the reason the Fed hadn’t raised rates at this meeting in the face of a weakening US economy was that it may be looking through tariff-induced inflation.
We must hope this language wasn’t intended merely to take aim at the President for the US economy and its monetary policy is a dangerous weapon to yield for such ends. However, the net effect was a significantly higher yield curve with even the terminal Fed rate settled a handful of basis points higher following the press conference. A strong labour market was cited as a compelling reason to leave rates on hold and its inclusion will keep the role of data elevated in the coming months. The logic that elevated inflation will truly be transitory this time around is because tariff induced inflation should represent a one-time shift higher in prices and not a factory that creates persistent inflationary pressures. Tariff-induced inflation would only be able to create consistent inflationary pressures whereby imported values either increased from tariff exposed countries or the level of those tariffs themselves increased. Still, data will need to confirm this trend. We commence that path with the Fed’s preferred measure of inflation, core PCE, today.
Discussion and Analysis by Charles Porter
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