Fed may not cut before September’25 despite Trump's pressure

·       Fed will also treat any tariff inflation as transitory and thus may not hike rates, but will be in wait & watch mode till at least August’25

·       Musk’s separation from the Trump administration may result in a more hawkish tariff policy, as Musk was acting as a dove on this issue

·       Fed needs another 100 bps disinflation from present levels to bring average core inflation to pre-COVID levels and the 2.0% target

·       Fed is treating the present unemployment level of 4.2% as almost at a sustainable minimum for the longer run, but will also try to bring it down to 3.5% pre-COVID levels by 2026-27

·       Fed is expecting 15.5% weighted average Trump tariffs as a base case, which would be borne by US importers, consumers, and foreign exporters by 1/3rd each, and around 100 bps inflation impact

Before the Federal Reserve (Fed) entered the blackout period for the June 18, 2025, FOMC meeting (starting June 17, 2025), various Fed officials provided insights into their monetary policy stance, primarily focusing on maintaining current interest rates and monitoring economic uncertainties, particularly related to tariffs. Fed would be in wait & watch mode till at least August 2025, by when Trump tariff policy is expected to take a concrete trajectory; Fed may resume its rate cut cycle again from September 2025, after one year (September 2024), when it surprised the market with a 50 bps rate cut followed by another 25 bps each in November and December 2024.

The Fed may have frontloaded at least 50 bps of rate cuts well in advance in anticipation of Trump trade war tantrum 2.0. The Fed has also made some policy mistakes in H1CY24 by not cutting at least 25 bps despite a favorable macro equation (slowing inflation and increasing unemployment). Thus Fed had gone for 100 bps rate cuts in H2CY24 before going for a long pause to assess Trump’s uncertain policies on trade, and also immigration, tax cuts & other fiscal actions coupled with deregulation.

Trump is now pressuring Fed/Chair Powell to cut rates by 100 bps as there is no inflation. As an economic expert and more knowledgeable than Fed Chair Powell, Trump also advised Fed/Powell to increase the rate again after 2 years (when Trump’s 2nd term will end), if inflation resurfaces. Trump is also pointing out higher borrowing costs for the US public debt because of higher Fed rates and bond yields. Trump is quite conscious about a potential US economic slowdown because of his bellicose tariff & trade war policies and thus wants to shift the entire blame to Fed Chair Powell, the ‘Mr. Late in cutting rates. Trump thinks that if the Fed cuts rates by another 100 bps in 2025, no economic slowdown will happen despite his chaotic tariff policies.

Ahead of the Fed blackout period for the June 18 FOMC meeting, a deluge of Fed talks indicated:

·       Interest Rates Expected to Hold Steady: Fed officials indicated that interest rates would likely remain at 4.25%–4.5% for the June meeting. This expectation was supported by recent FOMC minutes and public statements, which highlighted a cautious approach due to economic uncertainties.

·       Transitory Tariff Impacts on Inflation: Fed officials, including Chair Jerome Powell, emphasized the potential inflationary effects of tariffs, particularly those proposed by the Trump administration. They noted that tariffs could temporarily drive inflation, especially in the second half of 2025, but the Fed was awaiting further data to assess their impact. Governor Christopher Waller specifically mentioned expecting tariffs to be the largest factor driving inflation. As the potential tariff inflation may be transitory, the Fed will have a wait-and-watch approach and may not hike in response to higher inflation. But the Fed is also cognizant of its past policy mistake of treating the post-COVID era inflation surge as transitory initially, not resorting to early rate hikes. But the Fed has also pointed out that the Labor supply shortage post-COVID is behind this unexpected surge in inflation.

·       Cautious Monetary Policy Stance: The May 6–7, 2025, FOMC minutes revealed that officials saw increased uncertainty in the economic outlook, particularly regarding inflation persistence and labor market conditions. They agreed on a cautious approach, with some noting potential "difficult tradeoffs" if inflation remained elevated while the labor market weakened.

·       Powell’s Public Statements: On May 29, 2025, Powell met with President Trump, who reportedly pushed for immediate rate cuts. Powell, however, reiterated that monetary policy decisions would depend on incoming economic data, not political pressure. At the May 7, 2025, press conference, Powell emphasized the economy’s steady progress and the need for clarity on Trump’s policy impacts.

·       Economic and Labor Market Conditions: The Fed noted solid labor market conditions, despite trade policy uncertainties. Inflation was slightly above the Fed’s 2% target, with core PCE inflation at 2.6% year-over-year in January 2025, down from 3.1% the previous year, but still around 100 bps higher than the pre-COVID period. Fed’s real target of core PCE inflation is around 1.6%, and core CPI inflation is 2.3%, the average of which comes to around 2.0% core inflation target. The US core PCE inflation is always 50-100 bps lower than core CPI inflation, and the US Congress has given the Fed a target of 2% inflation on a sustainable basis.

·       Balance Sheet and Quantitative Tightening: The Fed planned to further slow quantitative tightening (QT) in April, reducing the monthly cap on Treasury redemptions officially to $5 billion from $25 billion. The May minutes also noted smooth operations in the standing repo facility and low take-up at the overnight reverse repurchase agreement facility.

Overall, Fed officials expressed a wait & watch approach, prioritizing data-driven decisions amid uncertainties from trade policies and inflation. No rate cuts were anticipated for June, with potential easing later in 2025 depending on economic developments.

Highlights of comments by Fed’s Bostic on June 3, 2025

·       The best monetary policy approach now entails patience

·       I am very cautious about jumping to cutting rates

·       It's a tough call to say if the Fed would be cutting rates absent trade uncertainty.

·       Still sees a possible path to one interest rate cut this year, depending on the economy.

·       I am in no hurry to adjust our policy stance

·       Given a healthy economy, the Fed has time to see how uncertainty resolves

·       Recession is not in my forecast right now

·       There is no sign that tariffs have boosted inflation

·       The job market appears broadly healthy, with some signs of weakness

·       Hard data has yet to reflect a gloomier sentiment mood

·       Unclear right now how tariffs will affect the inflation outlook

·       There is still a way to go on inflation

·       Core prices are still an issue

·       I'm not declaring victory on inflation yet

·       I need to see more progress on lowering inflation before supporting a rate cut

Highlights of comments by Fed’s Goolsbee on June 3, 2025

·       We have to wait and see if tariffs have a big or small inflation impact

·       We could see a direct tariff effect on prices within a month

·       Slowdown related to tariffs might not show up for a while in the data

·       All indicators point to stable and full employment

·       Expect increased inflation and reduced activity because of tariffs

·       Warns tariffs could lead to a stagflation environment

·       We will have to wait and see if tariffs have a big or small impact

·       Concerns that the dollar will stop being the world's reserve currency look overstated

·       Escalating unbounded trade war could spiral up the inflation rate

Highlights of comments by Fed’s Logan: June 3, 2025

·       The Fed should consider how to better convey key risks, uncertainties, and policy responses

·       The Fed should pay attention to overshooting full employment, not just employment shortfalls

·       The Fed should focus on achieving 2% inflation and not try to make up for past inflation shortfalls

·       The monetary policy framework should be robust to a range of scenarios

Highlights of comments by Fed’s Kashkari: June 4, 2025

·       The labor market is showing some signs of slowing

·       Still not back to the 2 percent inflation target

·       Firm Uncertainty Overhang for the Economy

·       The Fed must wait and see as the economy faces uncertainty

·       Bond, Stock Markets Sending Very Different Signals

Fed's Schmid:

·       Uncomfortable looking through tariff inflation

·       I'm uncomfortable with a look-through policy approach to tariff-driven price increases.

·       The extent of tariff-driven price push won't be fully apparent for some time.

·       I expect tariffs to start to show through to prices in the coming months.

·       I'm optimistic that economic activity can be sustained.

·       I am focused on maintaining the Fed's credibility on inflation

·       Fed policy needs to be nimble to balance the two sides of the mandate

·       The extent of tariffs' drag on growth and employment is also unclear

·       I am seeing some opportunities to operationalize some artificial intelligence within the Fed

Fed's Kugler:

·       I view inflation as a bigger risk right now than weaker employment.

·       We haven't seen the full extent of the impact of tariffs on prices.

·       Inflation will be the first-order effect; other effects will be down the road.

·       The pandemic inflation experience is still affecting expectations.

·       My focus now is on inflation.

·       Once tariffs are fully implemented, we can start talking about other effects, but that hasn't happened yet.

·       Unemployment is still at a historically very low rate.

·       I view inflation as a bigger risk right now than employment

·       Declining net inflows of immigrants might make the labor market tighter

·       I could start seeing some of those impacts in some sectors by the end of this year

·       I expect to start seeing effects in construction, agriculture, leisure & hospitality, health, and food processing.

·       It's premature to expect big job losses from AI.

·       One way a rising deficit might affect the Fed is that it could raise the neutral rate of interest.

·       The majority of Fed officials worried about inflation before growth

·       Also, debt and deficit will affect yields in the bond market. If things become more permanent and affect financing conditions, we will pay more attention

·       The Fed rate is now between moderately and modestly restrictive

·       Given tariffs, we should be holding it where it is

·       Warn notices of layoffs have ticked up since the start of the year, as have layoff mentions in the Beige Book.

·       View current Fed policy as moderately restrictive

·       Core services inflation is still above the pre-pandemic rate

·       Progress on core goods inflation has reversed

·       Expect a reversal of the import surge in the coming months to signal larger price increases.

·       I still see stability in measures of longer-run inflation expectations

·       Nontraditional indicators suggest the economy might be starting to slow

·       Nontraditional data are consistent with my assessment that we might be seeing some moderation in growth, but not yet a significant slowdown.

·       I continue to support maintaining the rate if upside inflation risks remain.

·       I see greater upside risks to inflation and potential downside risks to employment and output growth.

·       The labor market appears resilient and stable.

·       Economic activity continues to grow, but at a more moderate pace than in the second half of 2024

·       Trade and other policy changes may raise the jobless rate and push employment away from the Fed's objective.

·       Front-loading of imports makes judging the current strength of the economy difficult.

·       April spending and income data point to a slight moderation in activity

Fed's Harker:

·       The Fed may face rising inflation and unemployment at the same time.

·       Hard data have remained robust.

·       The US economy is resilient, but there are stresses in the foundation.

·       The economy faces many different possible paths.

·       Thus far, the job market has been mostly stable

·       Estimating tariff impact is a moving target

·       The business community mainly wants stability in trade policy at this point.

·       The Fed faces no rush to shrink the size of its balance sheet

·       I'm not making policy decisions based on the neutral rate

·       Amid uncertainty, it's still possible the Fed can cut rates later this year

·       Uncertainty makes it very hard to divine a monetary policy outlook

·       I'm worried the quality of economic data is eroding

·       We're increasingly flying blind when it comes to critical data

·       I'm very worried about the current state of government finance

·       Deficits must be reined in amid rising challenges to the US financial system

·       I see steadiness in solid latest job data

·       Businesses want policy certainty, and they're not getting it

·       Much of the tariff's impact is yet to be felt

·       Fed policy is moderately restrictive

·       Now is the time for the Fed to hold steady and watch data

·       Taking preemptive action would be a mistake

Minutes of the Board's discount rate meetings on April 7, April 28, and May 8, 2025

·       Overall, Federal Reserve Bank directors noted considerable uncertainty about the outlook.

·       Overall, Reserve Bank directors noted considerable uncertainty about the outlook.

·       While most directors described recent economic conditions as generally stable, they also expressed concern about the potential impact of evolving trade and other policies on economic activity, prices, and employment.

·       In light of elevated uncertainty, many directors had observed consumers and businesses becoming more cautious about their spending and plans.

·       Several directors commented on the expected price pressures related to tariffs, including higher prices for consumers.

·       Labor market conditions remained healthy, with some directors noting low turnover and limited layoffs.

·       Some directors said businesses in their Districts had indicated future staff reductions might be needed to absorb costs associated with tariffs and reduced government funding in certain sectors.

Highlights of Fed’s latest Beige Book: May’25

·       Employment has changed little since the previous report

·       Prices have increased at a moderate pace since the previous report

·       Reports across the twelve Federal Reserve districts indicate that economic activity has declined slightly since the previous report

·       A few district reports indicate the outlook has deteriorated, while a few others indicate the outlook has improved

·       Economic Activity: National economic activity has grown slightly since early April, with varied performance across districts and industries. Most districts reported slight to modest growth, though two noted no change.

·       Consumer Spending: Mixed, with some districts seeing slight increases in discretionary spending, while others reported flat or declining retail activity due to price sensitivity.

·       Employment: Employment rose slightly overall. Hiring was modest, with some districts noting increased labor availability, though shortages persisted in certain sectors like construction and hospitality.

·       Wages and Prices: Wage growth was modest, and price increases were generally mild. Some districts saw rising costs for materials and insurance, but consumer pushback limited firms' ability to pass on higher costs.

·       Manufacturing: Mixed, with some districts reporting slight growth and others noting declines.

·       Housing: Residential real estate showed a slight improvement in sales, but high interest rates continued to dampen demand.

·       Commercial Real Estate: Weakened slightly, with high office vacancies and softening in industrial and multifamily sectors.

·       Banking: Loan demand was flat to slightly up, with some districts reporting tighter credit standards.

·       Energy: Activity was flat to slightly up, with stable or modestly rising production.

·       Outlook: Businesses were cautiously optimistic, expecting continued slow growth but expressed concerns about uncertainties like administration policies, inflation, interest rates, and consumer demand.

In summary, the Fed’s latest Beige Book continues to show the Goldilocks nature of the US economy. But a potential higher cost of living due to Trump’s bellicose policies may damage that perception and may also affect the US productivity, which is the ultimate goal for any economy.

Conclusions

Fed may not cut in June-July 2025 amid lingering Trump tariff talk uncertainty, but may act in September’25 and December’25 depending upon Trump’s implemented tariffs and overall US economic situation. Fed may be waiting & watching stance till mid-September 2025, as by then Trump’s tariff policies may take a potential clear shape of a 10% basic/universal rate with some sectoral tariffs ranging from 25% to 50%. Even if Trump makes a final decision of a 10% ‘smaller’ tariff, including that on China by early July (along with sectoral tariffs), the Fed needs time to evaluate the weighted average cost of tariffs on the economy and thus may act only from September 2025.

Trump may extend his reciprocal tariffs pause from July-August to December’25 to ensure no supply shock for the US economy. Trump will use the US adverse court ruling as an excuse for a face-saving exit from his tariff mess. Trump may continue his chaotic tariff policy to get a fair trade deal for the US. If Trump goes on with his higher reciprocal tariffs, it would cause a supply shock and a higher cost of living for ordinary Americans, most of whom live on a pay check to paycheck-to-paycheck basis. Further, such tariffs would cause a demand shock in the future and an all-out recession. This will also cause a loss of Vote Bank (ordinary Americans) and Note Bank (political funding by corporate America) for Trump and Republicans. Thus, court or no court, Trump is bound to blink and may take a less hawkish tariff position in the coming days. But the separation of Musk from the Trump admin may result in more hawkish tariff policy going forward, and thus the Fed will be in wait & watch mode till at least August’25.

Technical outlook: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42600) now has to sustain over 42900 for a further rally towards 43200/43600*-44000/45300 in the coming days; otherwise sustaining below 42800, DJ-30 may again fall to 41900/41700-41400/41000* and further 40600/40100-39200/38000 in the coming days.

Similarly, NQ-100 Future (21600) has to sustain over 22000 for a further rally to 22400/22500-22700/23000 in the coming days; otherwise, sustaining below 21900, NQ-100 may again fall to 21900/20900-20700/20200 and 19890/18300-17400/16400in the coming days.

Also, technically Gold (CMP: 3350) has to sustain over 3375-3395 for a further rally to 3405/3425*-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3365, Gold may again fall to 3340/3320-3300/3280 and 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.