As seen by their absence, the U.S. economy is a huge tent and difficult to be all encompassing. Federal Reserve officials prepare for Jerome Powell’s semi-annual appearance before Congress, it comes under more scrutiny. Most experts think this highly anticipated annual address will be a bust, yielding very little new information on the direction of monetary policy. With the realities of changing investor sentiments and still-challenging economic conditions, the market’s perfect storm. Focus shifts to state and federal major investment indicators and potentially significant policy changes.
Federal Reserve officials have explained their decisions to respond to rising inflation and raise tariffs. Vice Chair Lael Brainard and Governor Christopher Waller, both appointed by former President Donald Trump, set the tone and direction. Waller and Brainard pointed out that tariffs could act as a one-time shock that the economy might be able to absorb without significant long-term repercussions. This claim amounts to a concession that though tariffs might temporarily harm functioning markets, they do not create lasting inflationary forces.
Economists have differing opinions about the effects of increasing tariffs. St. Louis Fed President Austan Goolsbee noted that if inflation is steady with these tariffs, the Fed can bring down borrowing costs. Here’s how this move could help jumpstart the economy.
“If we do not see inflation resulting from these tariff increases. Then, in my mind, we never left what I was calling the golden path before April 2.” – Chicago Goolsbee
The other big challenge on the horizon is the labor market. The current anti-immigration enforcement from Trump-era policies continues to worsen labor shortages during this ongoing pandemic. Employers are fighting for a dwindling pool of available workers. Wages are about to take off, and that’s bound to have a big impact on national economic growth. This labor shortage will make the Fed’s job tougher as it considers the inflationary impact of increased wages.
Based on recent trends, here’s why we think non-U.S. investors are behind most of the U.S. asset sales. European investors seem to be the most concentrated in equity-related, broad-based selling pressure while we find Asian investors more specialized in selling fixed income to raise cash. This important change creates new uncertainty about foreign countries’ confidence in U.S. markets, which could significantly impact domestic economic conditions.
Even worse, big European funds have reportedly begun to liquidate U.S. equities. Analysts are still looking to see what that means for overall market stability and consumer confidence. As usual, market watchers will be extremely attune to Powell’s speech. In particular, they’re looking at the trade deficit—the monthly and especially the quarterly version—and trade, plus the Philly Fed and Richmond Fed regional surveys.
The markets will be ready to respond accordingly on report after report. Of concern particularly as it relates to consumer confidence and capital flows are findings contained in the Treasury International Capital (TIC) report. CME Fed funds futures bettors expect a 20.7% chance of a rate cut in July. This points to the market’s confusion over what future monetary policy will be.
As the month comes to a close, volatility could increase further, particularly with quarter-end and half-year end coming up as well. That possible reality only raises the stakes on policymakers to offer a clear path forward during Powell’s speech, though hopes are still low.
Analysts suggest that while Powell’s speech might not deliver groundbreaking revelations, it will underscore the Fed’s commitment to monitoring economic conditions closely. Market participants are all too aware of the precarious tightrope the Fed walks between nurturing a nascent recovery and containing rampant inflation.