Powell Remains Circumspect on Timing Potential Policy Easing

• The fed funds policy rate was left unchanged at 4½% as widely expected

• Markets didn’t like Powell’s continued patience…

• ...that avoided teeing up a cut in September…

• ...in favour of watching “months” of data and developments

• Trump photobombed the Fed with tariff announcements on copper, commercial de minimis exemptions and Brazil

The FOMC left the fed funds target range unchanged at 4.25–4.5% as universally expected. There were small statement changes and two dovish dissenters that were not surprising, but Chair Powell remained noncommittal in terms of if—and—when the Committee may ease monetary policy. President Trump photobombed the communications with a series of tariff announcements at the 2pmET drop of the FOMC statement.

Markets responded by pushing the S&P500 down about ¾% mostly during the press conference as they hoped for a clearer sign that easing could begin by the September meeting and did not get one. The two-year Treasury yield moved up by about 6–7 bps also mostly during the press conference. The ten-year Treasury yield backed up and the USD appreciated. See the intraday moves in charts 1–4. Fed funds futures pricing for the September meeting was pared by about 4bps toward a 50–50 bet and cumulative pricing for the rest of this year was pared by about 7–8bps to less than 40bps.

Overall, the communications largely met my expectations for a neutral-hawkish stance.

STATEMENT CHANGES

There were only three statement changes and only one that mattered. Please see the accompanying statement comparison.

The one that mattered was on the voters. Two dissented in favour of cutting at this meeting. They were Governors Waller and Bowman. Governor Kugler was absent.

Secondly, the statement now says “growth of economic activity moderated in the first half of the year.” That’s largely just a truism. Q3/Q4 growth last year was 3.1% and 2.4%. Q1/Q2 growth this year was -0.5% / 3.0%.

Third is the changed reference to uncertainty that struck out diminished and just says it remains elevated. Theoretically that could just be flagging that it hasn't continued to diminish since the June meeting, or that it has increased since then. Powell clarified what was meant in his press conference by saying that at the time of the last meeting, uncertainty had moved down a bit, but this time it had not so they struck that out.

MORE TARIFFS

The White House issue a series of ‘fact sheets’ on tariffs at the same time as the FOMC statement landed. Either they were trying to bury any reaction behind the Fed or goading the Fed, you pick. Rarely are such thinks merely coincidental. The copper is here and see charts 5–6 that show where the US gets the affected products, the De Minimis commercial exemption announcement is here, and the Brazil one is here. 

PRESS CONFERENCE HIGHLIGHTS—PATIENCE OVER “COMING MONTHS” AND NO SEPTEMBER TEE-UP

Chair Powell came out swinging at the start of his press conference by saying growth is solid, labour markets are largely in equilibrium at full employment with inflation a bit above target. His opening line was therefore communicating no urgency to ease.

He then noted that increased tariffs are pushing up prices in some categories of goods and that nearer term inflation expectations have also edged up and are probably driven by tariffs while longer-term measures remain reasonably anchored.

Powell extended his tariff focus by noting that higher tariffs are beginning to come through but the overall effects on inflation are uncertain. He said that the view that it is a temporary one-off price level adjustment is reasonable. He said it is also reasonable that they could feed more persistent price pressures. Time will tell.

What I thought leaned against September 17th in terms of possible easing was Powell’s remark that "In coming months we will receive a good amount of data" that will inform their stance. Key here is the "coming months" reference that doesn't sound like September by way of wishing to see a fair amount of data and developments.

When asked directly about a cut in September, Powell said “We have made no decisions about September. We will take all information as we make our decision at the September meeting.” He went on to cite evidence that the policy rate is modestly restrictive, the labour market is solid, financial conditions are accommodative, and that the economy is not performing as if the policy rate is holding it back. Powell described policy as modestly restrictive and that this seems appropriate.

When asked what the Committee has learned over the past few months about the price pass through process including the June report that showed some tariff effects and whether two months is a long enough horizon to evaluate how tariffs are affecting inflation, Powell said:

“The evidence shows companies upstream from the consumer are paying most of the tariff effects for now. We expect to see more pass through to consumers. Little is being paid by foreign companies. We are just going to have to watch and learn empirically. I think we've learned that the process is going to be slower than expected at the beginning. We never expected it to be fast.”

Powell then said you could argue they are looking through tariff pass through effects so far by not raising rates and that in the end they will make sure this does not move from being a one-time price increase to being inflationary.

When asked what if the One Big Bill will add stimulus in 2026 and cut back on potential rate cuts next year, Powell said “The biggest part of the bill was making permanent existing law on taxes so we don't see it as significantly stimulative. It should be somewhat stimulative but not a lot.” True, though the MAGA camp thinks it’s highly stimulative.

CONCLUSION

The clear message continued to be one of patience. Bring on this Friday’s nonfarm payrolls and one more thereafter, two more PCE gauges and two more CPI prints, Q2 GDP revisions, a bevy of other data releases, and who knows what further policy changes by the US administration. If, however, tariffs continue to pass through into inflation with reasonably resilient payrolls at a lower breakeven rate in light of more restrictive immigration policy, then the Committee’s willingness to cut in September is likely to remain low.