Tariffs weigh on Fed outlook: Here's what to know

Key Concepts:

• Federal Reserve (The Fed) interest rate decision
• Dissent within the Federal Open Market Committee (FOMC)
• Probability of future rate cuts (September, October, December, January)
• Impact of trade deals and tariffs on the economy
• Inflation and its potential drivers
• Market expectations and Fed communication

1. The Fed's Decision and Internal Dissent:

• The Fed decided to hold interest rates steady.
• Two governors, Bowman and Waller, dissented, advocating for a quarter-point rate cut. This is the first time there have been dissents since 1993.
• Fed Chair Jay Powell acknowledged the governors' arguments but did not indicate immediate support.

2. Future Rate Cut Probabilities:

• The market has adjusted its expectations for future rate cuts.
• The probability of a rate cut in September has decreased significantly from 68% to 44%.
• October is now the month where the market is placing its bets for the first rate cut, with a probability of 63%.
• The likelihood of a second rate cut in December has decreased, with January now being more likely.
• The market is currently pricing in only one rate cut for the year.

3. Impact of Trade Deals and Tariffs:

• Powell stated that while the "effective level of tariffs is not moving around that much," many uncertainties remain unresolved.
• He emphasized that the Fed is still learning about the full impact of trade policies and that the process is far from over.
• The FOMC statement echoed this sentiment, noting that "uncertainty remains elevated."

4. Market Expectations and Fed Communication:

• Powell is trying to manage market expectations to avoid being "boxed into a corner."
• He wants to maintain flexibility to respond to incoming economic data.
• He kept open the possibility of a rate cut if the data support it.

5. Tariff Inflation and Economic Impact:

• A Goldman Sachs report suggests that the economy has only seen half of the impact of already enacted tariffs.
• The report estimates that the effective tariff rate has increased by 7% and is expected to rise to 14%.
• The key question is whether these tariffs will create broader inflation.

6. Upcoming Information:

• More insights into the Fed's thinking will be revealed in an exclusive interview with Atlanta Fed President Raphael Bostic.

7. Notable Quotes:

• Jay Powell: "The likely, you know, effective, effective level of tariffs is not moving around that much at this point. But at the same time, there are many, many uncertainties left to resolve. So yes, we are learning more and more. It doesn't feel like we're very close to the end of that process. And that's that's not for us to judge, but it feels like there's much more to come."

8. Logical Connections:

• The Fed's decision to hold rates steady is linked to the uncertainty surrounding trade policies and their potential impact on inflation.
• The market's shifting expectations for rate cuts reflect the evolving economic outlook and the Fed's communication strategy.
• The Goldman Sachs report provides a quantitative assessment of the potential impact of tariffs on the economy, which informs the Fed's decision-making process.

9. Synthesis/Conclusion:

The Fed's decision to hold interest rates steady reflects a cautious approach amid ongoing uncertainties related to trade policies and their potential impact on inflation. Internal dissent within the FOMC highlights differing views on the appropriate course of action. The market has adjusted its expectations for future rate cuts, and the Fed is carefully managing communication to maintain flexibility in responding to incoming economic data. The full impact of tariffs on the economy remains uncertain, and the Fed will continue to monitor developments closely.