Link Securities | In his speech before the House Financial Services Committee (the lower house of the US Congress), Federal Reserve (Fed) Chair Jerome Powell affirmed the central bank’s commitment to keeping inflation under control, stating that he expects monetary authorities to remain on hold until they have a better understanding of the impact that tariffs will have on prices.
Powell described economic growth as solid and the labour market as close to full employment. However, he noted that inflation is still above the Fed’s 2.0% target and that the impact of the new tariffs is still unclear. In this regard, Powell noted that policy changes continue to evolve and their effects on the economy remain uncertain, and that the effects of tariffs will depend, among other things, on their final level.
Finally, it should be noted that Powell reiterated that monetary authorities are ‘well positioned to wait for further information on the likely path of the economy before considering any adjustment to our policy stance.’
In his testimony, Powell confirmed that most FOMC members are in favour of lowering rates later this year. However, he warned that the timing and amount of any cuts will depend on how the data evolves, and that tariffs have increased his inflation expectations for this year and the next, which will necessarily reduce the number of cuts.
Assessment: Despite pressure from President Trump to lower official interest rates, the Fed, through its chairman, appears to be opting to ‘wait and see’ until it can gauge the impact of the new tariffs on US inflation. Currently, the market only gives a 22% probability that the Fed will lower rates at its Federal Open Market Committee (FOMC) meeting in July, while it gives a probability of over 70% that it will do so in September.
In recent days, two members of the Fed’s board have spoken about the possibility of resuming the rate-cutting process soon. However, we believe that it would come as a surprise to everyone if this were to begin as early as July.
