Following today's interest rate decision, analysts believe the Fed's potential rate cuts will be extremely challenging, not only from an economic perspective but also from a communication perspective. Tom Graff, Facet's Chief Investment Officer, said the Fed faces a complex dilemma.
Graff noted that the newly implemented tariffs are expected to increase inflationary pressures, and therefore the Fed would ideally want to wait until inflation has peaked. However, he noted that despite this, the pressure to cut interest rates is growing. Even without external pressure from the White House, the recent weakening in the labor market is sufficiently concerning for the Fed, according to Graff.
He said this situation may be the main reason why Christopher Waller and Michelle Bowman voted against keeping interest rates steady and favored a rate cut at the last meeting.
Graff stated that this development could pave the way for the Fed to begin cutting interest rates in September, with one or two more cuts likely to follow later in the year. However, he emphasized that the biggest challenge is how to explain the proposed rate cut to the public and markets while potential price increases persist.
Graff noted that Donald Trump's persistent pressure for interest rate cuts further complicates the communication process, noting that any interest rate cut by Fed Chair Jerome Powell under these circumstances could be perceived as “bowing to Trump.” He also commented that a deeper deterioration in the labor market would increase the likelihood of a recession, and in this case, Powell could no longer afford to wait.
*This is not investment advice.
