Fed's Powell Leaves Interest Rates Unchanged Despite Trump Demands

Economic

Summary:

The Fed left its key short-term interest rate unchanged for the fifth time this year, at about 4.3%, as was expected.

Federal Reserve Chair Jerome Powell gave little indication on Wednesday of bowing anytime soon to President Donald Trump's frequent demands that he cut interest rates, even as signs of dissent emerged on the Fed's governing board.

The Fed left its key short-term interest rate unchanged for the fifth time this year, at about 4.3%, as was expected.

But Powell also signalled that it could take months for the Fed to determine whether Trump's sweeping tariffs will push up inflation temporarily or lead to a more persistent bout of higher prices. His comments suggest that a rate cut in September, which had been expected by some economists and investors, is now less likely.

“We've learned that the process will probably be slower than expected,” Powell said. “We think we have a long way to go to really understand exactly how” the tariffs will affect inflation and the economy.

There were some signs of splits in the Fed’s ranks: Governors Christopher Waller and Michelle Bowman voted to reduce borrowing costs, while nine officials, including Powell, opted to keep rates steady. It is the first time in more than three decades that two of the seven Washington-based governors have dissented. One official, Governor Adriana Kugler, was absent and didn’t vote.

The choice to hold off on a rate cut will almost certainly result in further conflict between the Fed and White House, as Trump has repeatedly demanded that the central bank reduce borrowing costs as part of his effort to assert control over one of the few remaining independent federal agencies.

Future rate trajectory

Powell has in the past signalled during a news conference that a rate move might be on the table for an upcoming meeting, but he gave no such hints this time. The odds of a rate cut in September, according to futures pricing, fell from nearly 60% before the meeting to just 45% after the press conference, the equivalent of a coin flip, according to CME Fedwatch.

“We have made no decisions about September,” Powell said. The chair acknowledged that if the Fed cut its rate too soon, inflation could move higher, and if it cut too late, then the job market could suffer.

Major US stock indexes, which had been trading slightly higher Wednesday, went negative after Powell's comments.

“The markets seem to think that Powell pushed back on a September rate cut,” said Lauren Goodwin, chief market strategist at New York Life Investments.

Powell also underscored that the vast majority of the committee agreed with a basic framework. Inflation is still above the Fed's target of 2%, while the job market is still mostly healthy, so the Fed should keep rates elevated.

On Thursday, the government will release the latest reading of the Fed's preferred inflation gauge, and it is expected to show that core prices, excluding energy and food, rose 2.7% from a year earlier.

Gus Faucher, chief economist at PNC Financial, says he expects the tariffs will only temporarily raise inflation, but that it will take most of the rest of this year for that to become apparent. He doesn't expect the Fed to cut until December.

Trump argues that because the US economy is doing well, rates should be lowered. But unlike a blue-chip company that usually pays lower rates than a troubled start-up, it's different for an entire economy.

The Fed adjusts rates to either slow or speed growth, and would be more likely to keep them high if the economy is strong to prevent an inflationary outbreak.

Earlier Wednesday, the government said the economy expanded at a healthy 3% annual rate in the second quarter, though that figure followed a negative reading for the first three months of the year, when the economy shrank 0.5% at an annual rate.

Most economists averaged the two figures to get a growth rate of about 1.2% for the first half of this year.

Supporters of faster cuts

The dissents from Waller and Bowman likely reflect jockeying to replace Powell, whose term ends in May 2026. Waller in particular has been mentioned as a potential future Fed chair.

Michael Feroli, an economist at JPMorgan Chase, said in a note to clients this week if the pair were to dissent, “it would say more about auditioning for the Fed chair appointment than about economic conditions".

Bowman, meanwhile, last dissented in September 2024, when the Fed cut its key rate by a half-point. She said she preferred a quarter point cut instead, and cited the fact that inflation was still above 2.5% as a reason for caution.

Waller said earlier this month that he favoured cutting rates, but for very different reasons than Trump has cited: Waller thinks that growth and hiring are slowing, and that the Fed should reduce borrowing costs to forestall a rise in unemployment.

There are other camps on the Fed’s 19-member rate-setting committee — only 12 of the 19 actually vote on rate decisions. In June, seven members signalled that they supported leaving rates unchanged through the end of this year, while two suggested they preferred a single rate cut. The other half supported more reductions, with eight officials backing two cuts, and two, widely thought to be Waller and Bowman, supporting three reductions.

The dissents could be a preview of what might happen after Powell steps down, if Trump appoints a replacement who pushes for the much lower interest rates the White House desires. Other Fed officials could push back if a future chair sought to cut rates by more than economic conditions would otherwise support.

Overall, the committee’s quarterly forecasts in June suggested the Fed would cut twice this year. There are only three more Fed policy meetings, in September, October, and December.

When the Fed cuts its rate, it often — but not always — results in lower borrowing costs for mortgages, auto loans and credit cards.

Some economists agree with Waller's concerns about the job market. Excluding government hiring, the economy added just 74,000 jobs in June, with most of those gains occurring in health care.

“We are in a much slower job hiring backdrop than most people appreciate,” said Tom Porcelli, chief US economist at PGIM Fixed Income.

Source: Euronews

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Michelle

Economic

Forex

The United States believes it has the makings of a trade deal with China, but it is "not 100% done," US Treasury Secretary Scott Bessent said on Thursday.

US negotiators "pushed back quite a bit" over two days of trade talks with the Chinese in Stockholm this week, Bessent said in an interview with CNBC.

"I believe that we have the makings of a deal," Bessent said.

China is facing an August 12 deadline to reach a durable tariff agreement with Trump's administration, after Beijing and Washington reached preliminary deals in May and June to end escalating tit-for-tat tariffs and a cut-off of rare earth minerals.

Bessent said he and US Trade Representative Jamieson Greer will speak to President Donald Trump later on Thursday about the August 12 deadline.

"There's still a few technical details to be worked out on the Chinese side between us. I'm confident that it will be done, but it's not 100% done, he said.

Many countries are rushing to cut deals ahead of August 1, when Trump has promised higher tariffs will kick in.

On India, Bessent said he did not know what would happen in trade talks, citing India's dealings with Russia. "They have not been a great global actor."

Asked if movement was possible before the Friday deadline, Bessent said: "I don't know what's going to happen. It will be up to India. India came to the table early. They've been slow rolling things. So I think that the president, the whole trade team, has been frustrated with them."

Source: Theedgemarkets

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Samantha Luan

Economic

Political

Trade talks between Chinese and US negotiators this week in Sweden have strengthened trust between the two sides and boosted confidence in resolving economic disputes via discussions, the Communist Party’s official newspaper said.

“The meeting sent a positive signal with the joint efforts by both sides,” the People’s Daily said in a commentary credited to Zhong Sheng, a Chinese homonym for “Voice of China” that’s often used to set out Beijing’s foreign policy views.The agreement to push for an extension of the pause on US reciprocal tariffs of 24% and Chinese countermeasures for 90 days is welcomed by all parties, it said.Such “pragmatic” arrangements “not only help build mutual trust and advance overall negotiations, but once again demonstrate it’s more efficient and less costly to resolve economic and trade disputes through dialogues and consultations,” according to the commentary.

Negotiators led by US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng wrapped their two-day meeting in Stockholm on Tuesday, the third round of talks in less than three months. While the Chinese side said the two nations agreed to extend an Aug. 12 deadline to resolve differences, US officials have said President Donald Trump will make the final call on maintaining the truce.The vice premier on Tuesday urged the US to work with China to enhance consensus and reduce misunderstanding, adding the two sides share “extensive common interests” and a “broad space” for economic and trade cooperation, according to an earlier report by the Xinhua News Agency.

The People’s Daily echoed the call in the commentary. China is focusing on expanding domestic demand as a strategy and making efforts to increase imports, with American companies as a “key beneficiary,” it said.“Since the US is keen to expand exports to China, it should work to reduce unnecessary restrictions and foster a favorable environment for two-way business collaboration,” according to the article.

Source: Bloomberg Europe

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Warren Takunda

Economic

President Donald Trump said Canada’s announcement it will recognize a Palestinian state “will make it very hard” for the U.S. to reach a trade agreement with its northern neighbor.

Trump’s threat, posted in the early hours Thursday on his social media network, is the latest way he has sought to use his trade war to coerce countries on unrelated issues and is a swing from the ambivalence he has expressed about other countries making such a move.

The Republican president said this week that he didn’t mind British Prime Minister Keir Starmer taking a position on the issue of formally recognizing Palestinian statehood. And last week he said that French President Emmanuel Macron’s similar move was “not going to change anything.”

But Trump, who has heckled Canada for months and suggested it should become its 51st U.S. state, indicated on Thursday that Prime Minister Mark Carney’s similar recognition would become leverage ahead of a deadline he set in trade talks.

“Wow! Canada has just announced that it is backing statehood for Palestine,” Trump said in his Truth Social post. “That will make it very hard for us to make a Trade Deal with them. Oh’ Canada!!!”

Trump has threatened to impose a 35% tariff on Canada if no deal is reached by Friday, when he’s said he will levy tariffs against goods from dozens of countries if they don’t reach agreements with the U.S.

Some imports from Canada are still protected by the 2020 United States Mexico Canada Agreement, which is up for renegotiation next year.

Carney’s announcement Wednesday that Canada would recognize a Palestinian state in September comes amid a broader global shift against Israel’s policies in Gaza.

Though Trump this week said he was “not going to take a position” on recognizing a Palestinian state, he later said that such a move would be rewarding Hamas, whose surprise Oct. 7, 2023, attack on Israel prompted a declaration of war and a massive military retaliation from Israeli Prime Minister Benjamin Netanyahu.

Trump’s new cudgel against Canada comes after he sought this week to impose steep tariffs on Brazil because it indicted its former President Jair Bolsonaro, a Trump ally who like the U.S. president has faced criminal charges for attempting to overturn the results of his election loss.

Citing a personal grievance in trade talks with Brazil and now Canada’s symbolic announcement on a Palestinian state adds to the jumble of reasons Trump has pointed to for his trade war, such as stopping human trafficking, stopping the flow of fentanyl, balancing the budget and protecting U.S. manufacturing.

Source: AP

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Glendon

Economic

Forex

Canada's Gross Domestic Product met expectations and shrank 0.1% in May on a monthly basis, but it is likely to regain the lost output in June led by a rebound in some sectors, data showed on Thursday.

An advanced estimate showed the GDP is likely to expand by 0.1% in June, and on an annualized basis it could a post a growth of 0.1% in the second quarter, Statistics Canada said.

A likely growth in the second quarter, which is contrary to most expectations of an expected contraction, could change when the final numbers are released next month.

In May, the biggest hit to growth came from the retail trade sector which contracted by 1.2%, StatsCan said, adding that activity across seven subsectors out of 12 contracted in the month.

Retail trade is a part of the larger services-producing industries which contributes up to 75% to the total GDP. The growth in the services-producing group was flat in May as a drop in retail trade was offset by real estate and transportation.

Amongst the goods-producing industries, which account for 25% of the GDP, mining, quarrying, and oil and gas extraction sector was the main laggard with activity shrinking by 1% in the month.

Howe ever, manufacturing grew by 0.7% in May on a monthly basis, countering 1.8% decline in April, as higher inventory accumulation largely contributed to the growth, the statistics agency said.

Canada's first quarter GDP had grown at 2.2% on an annualized basis as exporters advanced their sales to the U.S. to beat a barrage of incoming tariffs. But as tariffs took effect from March, exports and industrial output took a hit.

The Bank of Canada, after announcing that it would keep rates on hold at 2.75% on Wednesday, said that it expected the economy to contract by 1.5% in the second quarter due to a 25% drop in exports.

But a likely growth in Q2 could take away any incentive for a rate cut in September even though the data on inflation and job growth before the BoC's next meeting would be crucial.

The U.S. and Canada are currently locked in negotiations to hash out a trade deal by Friday in a bid to reduce tariffs, but negotiators have admitted that it may not happen by the deadline.

Source: Yahoo Finance

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Michelle

Economic

Forex

The Federal Reserve’s preferred measure of underlying inflation accelerated in June to one of the fastest paces this year while consumer spending barely rose, underscoring the dueling forces dividing policymakers over the path of interest rates.

The so-called core personal consumption expenditures price index, which excludes food and energy items, rose 0.3% from May, according to Bureau of Economic Analysis data out Thursday. It advanced 2.8% on an annual basis, a pickup from June 2024 that underscores limited progress on taming inflation in the past year.

The data also showed inflation-adjusted consumer spending edged up last month after declining in May.

The data illustrate the tug and pull in the economy that has Fed officials split over the course of monetary policy. On the one hand, progress on inflation has essentially stalled and central bankers fear that President Donald Trump’s tariffs will exert greater upward pressure on prices. On the other, a retrenchment in consumer spending due to a softening labor market risks a broader slowdown in the economy.

The Fed kept borrowing costs unchanged for a fifth straight meeting on Wednesday, though two governors dissented in favor of a quarter-point cut. Chair Jerome Powell was staunch in his defense of a solid labor market and upside risks to inflation that support keeping rates steady for now.

Stock-index futures remained higher, Treasury yields were still lower and the dollar was little changed after the report.

Source: Bloomberg Europe

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Warren Takunda

Economic

The Bank of Japan's policy makers unanimously opted to keep the base interest rate at 0.5% at its July policy update, while confirming that it remains dependent on data when shaping future policy decisions.

Referencing the value of the currency, which conyinues to lose value, it said "the yen isn't deviating much from BoJ's view".

According to analysts at TD Bank, this admission was particularly hurtful to the Yen as it shows the BoJ and government officials are happy for it to trade on the weak side. The currency's post-decision slide shows traders are more than happy to oblige the Bank's assesment:

The yen has lost ground against all its G10 peers over the course of the past 24 hours, building on increasingly chronic underperformance, with the currency also losing ground to all peers over the course of the past month.

The currency's month-long underperformance reflects growing uncertainty as to whether the central bank will be willing to cut interest rates while domestic politics remain in a state of flux.

"We still think it will hike rates in October 2025 and April 2026, based on our assessment of the underlying fundamentals. The risk to our view is that those hikes get pushed back owing to lingering political uncertainty," says Tom Kenny, Senior International Economist at ANZ.

Yen Dives Deeper as Bank of Japan is Kneecapped by Political Uncertainty_1

Politics have been an unhelpful headwind to Japanese assets and central bankers ever since polls started to show the ruling LDP-K coalition would lose its Upper House majority, which it duly did in the July 20 elections.

To pass legislation, the government will now need to make deals that include the priorities of the major opposition parties, which risks populist decisions that aren't necessarily helpful to Japan's financial market profile.

"Despite the U.S.-Japan trade deal, the BoJ remains cautious as the Bank emphasised that it wants to assess the impact from tariffs in the hard data. We suspect politics is the larger factor at play for the dovishness as Japan is in a tricky political period after the ruling coalition lost the Upper House election," says TD Bank in a note following the Bank's decision.

TD says to watch the LDP's plenary session of its Parliament members on August 8; once the political situation settles, the BoJ can always voice its opinion for an October hike through media leaks.

Prime Minister Shigeru Ishiba was put on resignation watch following the election which saw his Liberal Democratic Party, in power for most of the past 70 years, lose its coalition majority in elections to Japan’s upper house.

It lost its majority in the more powerful lower house, the House of Representatives, last year.

Nevertheless, ING Bank thinks inflation will reemerge as a primary concern for the BoJ, and prompt the delivery of further rate hikes.

"A notable upward revision to the inflation outlook increases the likelihood of a rate hike in October," says Min Joo Kang, Senior Economist for South Korea and Japan at ING Bank.

"In our view, the BoJ has eased its concerns about trade uncertainty and will now focus on the inflation mandate instead of risk management," adds Kang.

The Bank of Japan is expected to be the lone hiker amongst major peer central banks in the coming months, which if borne out, would help the Yen.

The yen has been kneecapped for years by Japan's ultra-low interest rates, but the BoJ has a window to reduce the JPY's interest rate advantage by raising rates as other central banks cut their.

However, this support won't materialise if the Bank is itself kneecapped by crippling political uncertainty.