Fed chair Jay Powell does not bend easily. Two Fed governors (Michelle Bowman and Christopher Waller) have called for rate cuts in July. Mr Powell wants to wait for the June and July CPI reports to gauge the impact of tariffs. The economy remains solid, he claims. Nevertheless, focusing on the CPI data for the next two months leaves the Fed open to accusations of short-termism. The June and July data should not matter. Tariffs are a one-off distortion to prices.
The Trump economic dogma is fraught with risks, but it is not impossible to see a pathway to a long, non-inflationary economic boom, with a different monetary policy. Jay Powell will be stepping down in May next year, and already, members of the FOMC are jockeying to take the helm. The Fed is unusually split because the outlook is binary. But it is split too, because there is a succession battle.
President Trump may be frustrated by Jay Powell. But a President that is prepared to make such a bold strike in another country, 18-hours flying time from US airbases, will not be deterred. Interest rates will come down, even if the US President has to wait until May next year. The doves are circling. And investors are taking note. The term premium may rise, but risk assets could yet fly.
