Yesterday’s eagerly awaited semi-annual hearing of Fed Chairman Jerome Powell before the US House of Representatives revealed little that was new. Essentially, he reiterated what we already know: that policymakers are under no pressure to adjust monetary policy quickly and can instead wait to see what impact US trade policy has. However, he did acknowledge that the impact of tariffs on inflation has been less severe than anticipated in April, which could result in interest rate cuts being implemented sooner than expected a few weeks ago, Commerzbank’s FX analyst Michael Pfister notes.
Additional interest rate cuts have been priced in
“The hearing comes at a time when decision-makers appear to be positioning themselves. My colleague Antje touched on this already yesterday. On Monday, Michelle Bowman of the Board of Governors advocated interest rate cuts in July if inflationary pressure remains subdued, which led to a significant depreciation of the US dollar. Federal Reserve Governor Christopher Waller had previously made similar comments, stating that he believed the federal funds rate was 1.25–1.5 percentage points above the neutral level. Both are candidates to succeed Jerome Powell next year.”
“Other decision-makers have fought back in recent hours. For example, the president of the Kansas City Fed does not seem to be in any hurry to cut interest rates. Like Powell, he would prefer to wait and see the effects of US tariffs. Federal Reserve Governor Michael Barr also expressed a similar view, emphasising that the real economy is currently in a solid position.”
“Heated discussions about an interest rate cut could take place as early as July if upcoming inflation figures do not indicate a greater impact from US tariffs. In such a scenario, expectations of interest rate cuts are likely to gather pace again. Since last week, additional interest rate cuts of around 12 basis points have been priced in by the end of the year. If the consensus within the FOMC continues to crumble in the coming weeks, this figure is likely to rise. This is not a good sign for the US dollar.”
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