John Wyn-Evans, Head of Market Analysis at Rathbones: “After weeks of headlines about the Federal Reserve’s independence, possible criminal charges against Jerome Powell and speculation over his successor, it was almost refreshing to see it return to the business of setting monetary policy. As expected, the Fed left the Federal Funds rate unchanged at 3.50% to 3.75%. Two members voted for a quarter-point cut. One, Stephen Miran, is widely seen as aligned with President Trump’s lower-rates agenda. The other, Chris Waller, may be positioning himself for the soon-to-be-vacant chair.
“As anticipated, the real interest lay in the statement and Powell’s comments. The Fed discouraged any idea of a preset path lower for rates, stressing decisions will be made meeting-by-meeting. That might disappoint the President but should calm fears—at least for now—of an overheating economy. Even so, there was no suggestion rates might need to rise again.
“The statement upgraded economic activity to ‘solid’ from ‘moderate’ and noted a ‘stabilising’ labour market. References to ‘downside risks’ were removed. That implies no urgency on the ‘maximum employment’ side of the mandate. With inflation ‘somewhat elevated’, the focus shifts to maintaining price stability. The ghost of Arthur Burns and the 1970s policy error clearly still lingers.
“Current inflation pressures are seen largely as tariff-driven, with around 96% of the burden falling on US consumers, according to the Kiel Institute. Absent further increases, their effect should be one-off. But markets fear the President may want to run the economy hot ahead of the midterms, with fiscal stimulus from the One Big Beautiful Bill Act and talk of more cheques.
“The market's concerns can be seen in the rise of the 2-year inflation breakeven rate, which is the expected rate of inflation that can be inferred from inflation-linked bond prices. That has risen from 2.3% to 2.75% since the start of the year. The 10-year rate has risen more moderately from 2.25% to 2.35%, suggesting that the market is not yet fearful that long-term inflation expectations are becoming unanchored. But the strong performance of, for example, gold and silver, as well as other metals, betrays investors' worries and the desire to find portfolio hedges against potential currency debasement as a result of higher inflation.
“The dollar’s decline has stabilised slightly after soothing Treasury comments, but its weakness is a headwind for sterling-based investors. Positively, it may dampen commodity and import costs, giving the Bank of England more latitude to cut rates, though not before July.”
|
