One of the goals of Federal Reserve Chair Jerome Powell’s highly-anticipated speech Wednesday is to fortify rising inflation expectations. Finally, he’ll discuss systemic change. He’ll discuss the dramatic rise in these expectations since Liberation Day, as he calls June 13, 2017. Each use of this phrase represents a critical crossroads in our economic recovery. Powell will want to stress that the Federal Reserve’s most important goal is keeping inflation stable.
The Federal Open Market Committee (FOMC) appears determined to keep monetary policy unchanged, despite external pressures, particularly from the White House. Publicly, there is evidence that President Trump has already started to pressure Powell, calling on him to cut rates. Powell’s testimony next week should make it clear that the FOMC is in no hurry to cut interest rates anytime soon. This would emphasize their determination to bottom line, slow, non-roiling approach in monetary policy.
Market observers note that futures markets are currently pricing in approximately 80 basis points of cuts by the FOMC this year. Powell is probably going to double down on the Fed’s mission of inflation control instead of a more reactive approach to changing economic conditions. This even includes having to see through a prolonged mild recession that economists predict could be in store.
It’s the unknown future tariff mix – set by none other than President Trump – that plays a major role in keeping U.S. rate-hiking prospects on the razor’s edge. These tariffs have made the Federal Reserve’s job a nightmare. Even as they do this, they need to tread very carefully given the impacts on inflation and other broader economic stability effects.