Fed to study effect of duties on prices in summer for rate decision: key takeaway from Powell's words

The U.S. Federal Reserve needs to wait for data on inflation and the impact of import duties on it before resuming rate cuts: especially important will be the data for June and July, said the head of the regulator Jerome Powell. He in his speech in Congress refused to assess the likelihood of easing policy at the next meeting of the Fed in July. The effect of duties may be weaker than they expect, but it is impossible to predict in advance, Powell said.

«We think we should start to see the impact of duties on inflation as early as June, July and August,» Fed Chairman Jerome Powell told Congress in a presentation to Bloomberg. - If that doesn't happen, that will also be an important lesson for us.»

It is impossible to predict in advance how the duties will affect prices in the U.S.: everything will become clear only in practice, and the Fed will have to deal with the data as they become available, Powell said. According to him, the Fed «quite admits» that the effect of higher import duties on consumer prices may be «weaker than we had anticipated, and that will certainly affect our policy.»

As noted by Bloomberg, it doesn't appear from Powell's speech that he is completely ruling out the possibility of a rate cut in July, notes Bloomberg. However, he emphasized that the regulator doesn't need to rush and can well afford to «wait to learn more about the likely course of the economy.»

«If it turns out that inflationary pressures remain contained, then we will come to a point where we cut rates sooner rather than later. But I wouldn't want to point to a specific meeting,» Powell said.

The July inflation figure will be available only by the September Fed meeting, Bloomberg recalled. Nevertheless, market participants during Powell's speech slightly increased their expectations for rate easing already by the end of July. Thus, according to the CME FedWatch tool, 18.6% of traders now expect a rate cut in July, compared to 16.5% after the Fed's decision last week to leave it unchanged. On the other hand, the vast majority - almost 91% - expect the rate to soften following the September meeting.

Major U.S. stock indexes strengthened after comments by the Fed chief, boosted by hopes for a strong ceasefire between Israel and Iran. Thus, the S&P 500 strengthened by more than 1.2% and hit its highest since February, the Dow Jones also rose by more than 1.2% at one point, and the tech-heavy Nasdaq Composite jumped by an immediate 1.6%. The yield on 10-year U.S. Treasuries fell 5.5 bps. - to 4.29%, while the Bloomberg Dollar Index slipped 0.6%.

- The dollar continues to maintain its safe haven asset status. Asked whether the Fed chief believes the spike in volatility in the Treasury bond market in April undermined the dollar's status as the world's reserve currency, he answered in the negative. He said the rule of law, price stability and open capital markets are what make the dollar the world's reserve currency, and the April volatility did not damage that. He added that maintaining the dollar's dominance «is not formally part of our mission,» although it is certainly important to the Fed. 

- The Fed has not yet succeeded in achieving price stability.» «We have not yet achieved full price stability,» Powell said, adding that inflation remains above the 2 percent target. He said the Fed should remain cautious in case of another inflation shock.

- Rate cuts will come even if the labor market continues to strengthen and inflation continues to rise. If the labor market continues to show resilience and inflation remains elevated, «I still believe we will come to lower rates - but not immediately, but later,» Powell said.

- Majority of the Fed members are in favor of cutting rates this year. The Fed chief emphasized that the majority of the Committee members believe it is prudent to cut rates this year. However, he also added that the future development of the economic path is now difficult to determine.

- Virtually all outside professional forecasters outside the Fed expect inflation to rise this year. Asked why the regulator isn't acting now if macroeconomic indicators are about the same as they were in September 2024, when the Fed began its rate-cutting cycle, Powell emphasized that the market expects inflation to rise because of the duties, and there are no signs of a weakening labor market yet. «As long as the economy remains strong, we can afford to take a pause,» Powell said, adding that this is why the Fed is not taking action yet.

-The Fed retains plenty of room to cut rates if necessary. Powell noted that the U.S. federal budget has been unsustainable for some time, but did not comment on fiscal policy. However, when asked whether rising deficits due to US President Donald Trump's taxes and spending could prevent the Fed from fighting the recession, Powell said: the Fed still has enough tools to cut rates if necessary.

This article was AI-translated and verified by a human editor