FedWatch's Ben Emons says FOMC may signal more cuts from here

Key Concepts

• Tensions between President Trump and Fed Chair Jerome Powell
• Federal Reserve (Fed) independence and political influence
• FOMC (Federal Open Market Committee) decision-making process
• Interest rate cuts and their potential impact
• The "shadow chair" concept and future Fed leadership
• Small business impact of rate cuts and tariffs
• Yield curve normalization
• Business inflation expectations

Scrutiny of the July Meeting

The upcoming July interest rate decision by the Fed is under intense scrutiny due to tensions between President Trump and Fed Chair Jerome Powell. Despite strong economic data (reasonable inflation, good employment, and retail sales), the possibility of rate cuts is being debated. Governor Waller's strong advocacy for rate cuts adds to the complexity. The market volatility observed when the possibility of Powell's removal became apparent highlights the sensitivity surrounding this meeting. The VIX (Volatility Index) is low, and the probability of a cut is priced near zero, suggesting potential for tension.

The "Shadow Chair" and Future Leadership

Even if Trump doesn't fire Powell, the market is already considering the "shadow chair" – the influence Trump exerts and the implications of the next Fed chair appointment. Powell's term is ending in less than a year. The market will pay attention to the next candidate and how that candidate will interact outside of the committee. While individual voices like Waller's can advocate for cuts, the FOMC ultimately makes the decision. The key signal from the July meeting will be the indication of future cuts and their timing. Daly's recent indication of being "on board" for cuts suggests a potential shift.

Impact on Small Businesses

Rate cuts could help small businesses reliant on short-term funding by normalizing the yield curve and lowering borrowing rates. However, the strength of the economy and the timing of cuts will influence the actual impact. Tariffs have clouded the business outlook for these companies. The Atlanta Fed's business inflation outlook remains high, creating a challenging situation. Historically, small caps have been positively correlated with rate cuts, suggesting a potential rally.

Conclusion

The Fed's upcoming July meeting is highly anticipated due to the political tensions and the debate over rate cuts. While strong economic data might suggest holding rates steady, the pressure for cuts and the uncertainty surrounding future leadership are creating market volatility. Rate cuts could benefit small businesses, but the overall impact will depend on the timing, magnitude, and the influence of other factors like tariffs. The FOMC's collective decision will be crucial in shaping market expectations and economic outcomes.