The President is pushing Federal Reserve Chairman Jerome Powell to lower interest rates, likely in hopes of appointing a more flexible successor. However, with inflation consistently above the Fed’s target for the past four years and tariffs affecting prices, justifying rate cuts is tough right now. Jobless claims are the highest they’ve been since 2021, hinting at a weaker job market. Yet, initial jobless claims have dropped for three consecutive weeks after a minor rise in early June, suggesting there isn’t a widespread layoff trend. The June non-farm payrolls report showed an increase of 139,000 jobs, while the ADP and ISM services data were softer. But there are no major warning signs. A new budget package, which keeps corporate tax rates low and encourages investment, might boost business spending and hiring. Changes in immigration policy are also contributing to wage inflation and record stock market highs. This can lead to increased investment, spending, and consumer confidence. However, the market’s expectation of nearly 97 basis points of rate cuts this year seems overblown given the current economy. The economy is sending mixed signals. On one side, inflation remains above targets, largely due to trade policies that raised import prices. This supports a case for maintaining interest rates to avoid pushing prices even higher. On the other side, job data isn’t clear-cut either. Rising continuing jobless claims typically indicate a softer job market, suggesting that unemployed people are struggling to find new jobs. Still, initial claims suggest the opposite, as they have dropped after a brief rise. This early data is usually more reflective of immediate business trends. So far, large layoffs haven’t occurred. Payroll growth is steady—not dramatic—but still shows hiring isn’t collapsing. Fiscal support from the budget, which sustains corporate tax rates, gives businesses some room to invest. This stability is crucial for job creation despite relatively high borrowing costs. Additionally, the record strength in stock markets stems from tax strategies, productivity gains, and increased consumer demand—partly from immigration. As stock markets rise and consumer confidence grows, companies may feel less urgency to lower rates. However, market expectations for nearly 100 basis points of easing in a year may be too optimistic. This pricing suggests a much weaker economy than what current indicators show. While some signs point to a slowdown, they don’t justify four rate cuts. Overreaching on this assumption could backfire if the data continues to show resilience. Futures contracts may be leaning too far in their expectations. Stock valuations, borrowing expectations, and rate-sensitive investments could react sharply if the anticipated policy changes don’t materialize. Powell hasn’t indicated he will take inflation risks lightly, and significant shifts may not happen until wage pressures and service prices decrease. Thus, we should brace for potential rapid adjustments in pricing. If rate cuts happen more slowly or in smaller increments, especially front-end positions will need adjusting. Political influences also play a role, as the President may influence the central bank leadership through new appointments. However, monetary policy must still navigate through inflation data challenges, which can’t be easily ignored. Moving forward, it’s crucial to focus on wage data, consumer spending trends, and core PCE inflation. These factors will significantly influence real policy changes. While it’s fine to prepare for easing scenarios, we must also consider that cuts might arrive later and more gradually than anticipated. This gap between expectations and reality could lead to swift market adjustments.

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