Fed Chair Jerome Powell is not only coming under pressure from the President to , but from members of his own team. Nonetheless, with the economy still growing and adding jobs, plus the uncertainty over the impact of tariffs on inflation, he suggests the FOMC remains in wait-and-see mode. We think they will wait until 4Q to cut
Powell’s Neutral Read on the Need for Cuts
The text of Fed Chair Jerome Powell’s testimony to Congress ahead of his morning appearance has been released. After President Trump’s call for policy rates to be “two to three points lower” and Fed Governors Chris Waller and Michelle Bowman suggesting they may be prepared to vote for a July rate cut, it isn’t particularly surprising that Powell remains non-committal.
The testimony appears to be an expanded version of the FOMC statement from last week when they held policy steady. He suggests that both the labour market and the economy in general remain “solid” and while “inflation has eased significantly from its highs… [it] remains somewhat elevated relative to our 2 percent longer-run goal”.
He suggests the Fed is waiting to see how tariffs play out and what the impact on inflation will be before acting, and in that regard, “we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.”
We Think the Fed Will Wait Until the Fourth Quarter to Cut
This doesn’t suggest he is in a hurry to cut rates. The market is now pricing 56bp of cuts for the second half of the year, with a September cut (23bp priced) followed by a December move seen as the most likely path. We don’t disagree with 50bp of cuts for the second half of 2025, but given that July and August are when the pass-through from tariffs will be at their maximum, the Fed probably won’t have the information to say that tariffs are not going to lead to longer term inflation by September’s FOMC meeting.
We suggest they may want to see confirmation of softer prints in September and October CPI reports (released 15 October and 13 November, respectively), given the stinging criticism they received when they said inflation would be “transitory” post-pandemic, only for it to hit 9% in 2022. Hence why we tend to think they may wait until December, but go by 50bp in response to cooler jobs numbers.
What may generate an earlier move is a rapid deceleration in job creation. The Fed’s own was particularly downbeat on this in its most recent edition, suggesting that “comments about uncertainty delaying hiring were widespread. All Districts described lower labor demand, citing declining hours worked and overtime, hiring pauses, and staff reduction plans”.
and are trending a little higher, and labour demand indicators, such as in the ISM report, don’t look particularly robust. Nonetheless, with the uncertainty over , the Fed would likely need to see clearer evidence of softness in the form of subdued payrolls growth and a rising unemployment rate to trigger an early move.
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