The market may be disappointed in pricing a September move, says Roger Ferguson

Key Concepts

• Federal Reserve (The Fed) interest rate decisions
• Fed independence
• Economic data dependence
• Inflationary pressures
• Tariffs and their impact on prices
• Market expectations vs. Fed actions
• ADP vs. Labor Department payroll data

Analysis of Potential Fed Rate Cuts

Roger Ferguson states that a rate cut at the upcoming Fed meeting is "almost impossible to imagine." He also expresses doubt about a rate cut in September, despite market expectations. He cites the strong economy, recent labor reports, and positive market performance as reasons why the Fed is unlikely to cut rates in either July or September. He emphasizes the importance of incoming data in influencing the Fed's decisions.

Fed Independence and Political Pressure

Ferguson acknowledges the pressure on the Fed to lower interest rates, particularly from the president. While he hopes the Fed will remain data-dependent, he admits that political pressure could backfire and influence some members. He laments the increasing politicization of the Fed's actions, arguing that it distracts from the core question of what is best for the economy given the Fed's mandate.

Theatrical Display and Credibility

Ferguson describes the president's presentation of economic data to Jay Powell as "theatrical." He notes that it is rare to see a Fed chair publicly correct the president. He believes such public pressure campaigns risk damaging the credibility of both the president and the Fed, depending on how the Fed responds.

Divergence in Payroll Data

Ferguson addresses the divergence between ADP private payroll data and the Labor Department's figures. He advises against reading too much into the ADP numbers, emphasizing that the official government numbers are what will drive the Fed's thinking. He mentions that the Labor Department's data accounts for the number of businesses that come and go, which is hard for ADP to understand in the short term.

Tariffs and Inflationary Pressures

Ferguson discusses the potential impact of tariffs on prices. He notes that the expected price increases have been delayed due to factors like inventory stockpiling. He anticipates a clearer picture in the second half of the year, potentially in the fourth quarter. While the Fed will likely reiterate the uncertainty surrounding tariffs, Ferguson believes a one-time impact on prices is inevitable. He expresses concern about the potential for an inflationary spiral and emphasizes that this is a key focus for the rest of the year.

Inflation Expectations and Potential "Bad Cycle"

Ferguson leans towards the possibility of inflationary pressures arising from tariffs. He points out that current inflation numbers are still above the Fed's 2% target. He suggests that consumers experiencing price increases could lead to a loosening of inflation expectations, especially if the Fed is simultaneously lowering rates. He warns of the potential for a "bad cycle" if inflation expectations rise.

Synthesis/Conclusion

Roger Ferguson believes that the Fed is unlikely to cut interest rates in the near term due to the strong economy. He acknowledges the political pressure on the Fed but hopes it will remain data-dependent. He expresses concern about the potential inflationary impact of tariffs and the risk of rising inflation expectations, particularly if the Fed lowers rates. He emphasizes the importance of monitoring economic data and avoiding a "bad cycle" of rising inflation.