Fed Chairman Jerome Powell’s recent hearing before the US House did not reveal many new details. He emphasized the need to observe the effects of US trade policy before making changes to monetary policy and noted that tariffs have had a milder impact on inflation than expected. There is growing talk about potential interest rate cuts. Michelle Bowman from the Board of Governors suggested that cuts could happen in July if inflation stays low, which could weaken the US dollar. Governor Christopher Waller mentioned that the federal funds rate might be about 1.25 to 1.5 percentage points above the neutral level.

The Federal Reserve’s Rate Strategy

Some officials prefer to be cautious about changing interest rates. The Kansas City Fed president and Federal Reserve Governor Michael Barr share Powell’s view of waiting to see the impact of tariffs first, pointing out the economy’s strong position. If inflation remains stable and unaffected by tariffs, discussions about rate cuts may heat up by July. The Fed might also foresee additional cuts of around 12 basis points by the end of the year, especially if there’s a shift in consensus among members. This developing situation poses challenges for the US dollar. This article explains how the Federal Reserve is evaluating when and how much to lower interest rates, with Powell mainly adopting a wait-and-see strategy based on data. The effects of trade policies, especially tariffs, on inflation and the economy are under close examination. While initial fears suggested that these tariffs might lead to significant price increases, Powell minimized that concern, indicating they are having a softer effect than anticipated. This keeps the possibility of holding rates steady open. However, other Fed officials are showing more immediate movement. Bowman hinted that rate cuts could start as soon as July if inflation holds steady. This view aligns more with market expectations, which are leaning towards quicker easing measures. We have already seen the dollar weaken as market participants adjust their forecasts. Waller contributed a technical perspective, noting that policy rates are likely still above the neutral point by over one percentage point. This suggests there is some room to lower borrowing costs without entering strict stimulus territory. The focus now shifts from the direction of rates to the urgency of those changes.

Market Reactions and Projections

Other committee members, like Barr and George, remain skeptical about making preemptive moves. They prefer to monitor how the economy reacts to tariff policies over time, embodying a cautious approach. However, Barr’s comments on the economy’s strength indicate the Fed is not feeling urgent growth risks. As we approach the July meetings, what happens in the meantime is crucial. Inflation data will be key. If consumer prices remain steady, the more dovish members of the Fed are likely to gain influence. Current projections suggest about 12 basis points of easing by year-end, but that could change with shifts in sentiment. In the coming sessions, we should pay close attention to market movements at the front end. Any adjustments there can signal changes in consensus. The relationship between real yields and inflation expectations may provide insight into how deep cuts are being factored in. If volatility increases in short-term instruments, especially swaps or fed funds futures, we should see that as an early signal rather than a delay. Differences among committee members often get reflected in the markets first, followed by official statements later. How long this tension persists or eases may guide our next steps. Create your live VT Markets account and start trading now.

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