Will the Fed cut interest rates this summer?

Powell Trump

Powell Trump

The report showed used-car prices dropped 1.4% from the prior month while new auto prices increased 0.1%; The index for motor insurance dropped the most since 2007.Shelter costs rose 0.2%, as owners-equivalent rent, one of the categories that tracks rental prices, increased 0.3%. Adjusted for inflation, average hourly earnings have climbed 1.3% in the past year.

The underperforming May payrolls have given another and stronger note to the inflation, equity and global growth chorus clamoring for a Federal Reserve rate cut.

Inflation has not been the chief driver in this movement. He noted that central bank independence rests on a "shaky platform" and the Fed's is "especially wobbly".

"Thanks to the poor performance of European currencies, the dollar has managed to rise although the latest inflation data enhanced Fed rate cut expectations", said Takuya Kanda, general manager at Gaitame.Com Research Institute. This sounds like obvious advice, but various surveys and the government shutdown earlier this year all show that many people are unprepared for periods of economic weakness.

-The report showed used-car prices dropped 1.4 per cent from the prior month while new vehicle prices increased 0.1 per cent. However, the Fed does not exclude any interest rate cuts, for example to boost inflation.

The Fed can afford to be aggressive because inflationary pressures are muted.

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"Our priority today is to put in place policies that will help sustain maximum employment and price stability, " Clarida said. Job growth slowed sharply in May.

Economists have warned that the tariffs will undercut the economy, which will celebrate 10 years of expansion in July, the longest in history. But every time Trump criticizes the central bank publicly, the pressure mounts for Fed officials to distinguish themselves. "Further escalation of the US-China trade dispute would increase the likelihood of a pre-emptive move from the Fed".

Economic growth in the second quarter seems to have slowed abruptly from the 3.1% annual pace in the first three months of the year. This was much lower than the 180K that investors were expecting.

"We are closely monitoring the implications of these developments for the USA economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric two percent objective". That is a very different answer than the blasé reassurances about inflation repeated so often over the last decade.

"Market pricing can go up and down so we can't be handcuffed to that". It wasn't until Fed Chairman Paul Volcker massively hiked interest rates and set off a brutal recession, ignoring massive public and congressional unrest in the process, that inflation was finally contained.

But Kathy Bostjancic of Oxford Economics said the Fed will hold off before cutting the benchmark lending rate, and watch to see the impact of tariffs on the economy. As a result the hopes for interest rates cuts that have been priced in are being priced out again.

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