The Fed is in a tough spot.
If these tariffs last, it could lead to 5% inflation in the US this year. Now many would argue that’s a temporary shock that policymakers would look thorough but that harkens back to the the ‘Team Temporary’ talk that is a stain on Powell’s legacy.
The market is now fully priced for a rate cut on June 18, with a high probability of another one at the subsequent meeting in July. Over the course of the coming year, there are 109 basis points.
I fear the Fed won’t come to the rescue. Recent Fed commentary has been shifting more hawkish, not in the other direction.
Some examples:
- Kugler: There may be reasons why tariffs have more prolonged effects
- Goolsbee: Fear is if tariffs on imports jumps out of just imports and move into other costs, or people freak out and change behavior
- Williams: My forecast is that inflation will be relatively stable this year with upside risks … Full impact of tariffs can play out over long horizon
- Daly said PCE data decreased her confidence in her forecast for two rate cuts this year
- Barkin warned not to assume just a one-time change in prices from tariffs
- Collins: Inflation risks are to the upside, it remains a question of how long tariff-driven inflation will last
There are no counter examples as these are all the Fed comments since the FOMC decision.
If Powell takes a more-hawkish tone, we should see another round of kicking-and-screaming in risk assets and a potential reversal of USD weakness. Then again, the market could also conclude that if the pain in equities is bad enough, the Fed put is still there.
This article was written by Adam Button at www.forexlive.com.