The Fed and the Furious
US consumers should brace themselves for higher prices in the coming months as the Fed signalled that the cost of new US tariffs will inevitably be passed on. While Fed policymakers voted unanimously to hold interest rates steady, at 4.25%-4.50%, awaiting greater clarity on the long-term inflationary impact of these duties, Fed Chair Powell explicitly stated, "Ultimately the cost of the tariff has to be paid, and some of it will fall on the end consumer.”
This cautious stance from the Fed comes despite recent inflation readings in the US easing below expectations. Powell confirmed that the Fed expects to gain further insight into the full effect of these tariffs over the summer, delaying any premature judgements on monetary policy. "We know that’s coming, and we just want to see a little bit of that before we make judgments prematurely," he added.
Despite the unified decision to maintain current interest rates, a clear split is emerging within the FOMC regarding the path for 2025. Although the median forecast still points to two rate cuts, aiming for a target range of 3.75%-4.00% by year-end, a growing number of officials - seven out of nineteen - now foresee no reductions this year, up from four in March. Furthermore, expectations for rates in 2026 and 2027 have modestly risen. Powell downplayed the division, emphasising the prevailing economic uncertainty and the data-dependent nature of future rate decisions. "No one holds these rate paths with a lot of conviction," he noted.
The latest economic projections from the Fed hinted at stagflation concerns. Forecasts for economic growth in 2025 were modestly downgraded to 1.4%, from 1.7%, while the unemployment rate is now expected to edge up slightly to 4.5% for this year and next. Core inflation, as measured by the Fed’s preferred gauge, is projected to rise to 3.1% this year, a notable increase from earlier estimates.
Trump was clearly disappointed with the decision to hold rates, calling Powell a “stupid person”. "Maybe I should go to the Fed. Am I allowed to appoint myself at the Fed? I'd do a much better job than these people”, he added. The Trump-induced uncertainty will remain, particularly as many country-specific tariffs are due to resume on the 8th July after a 90-day pause.
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