Have you been wondering what emoji best describes this week’s Fed meeting? James Smith is doing his best to win over Gen-Z again this week, as he looks back at a curious US interest rate decision and weighs up Europe’s fiscal woes. All that and more in our guide to the week ahead.
Let it not be said I don’t address the important questions in these articles, so here’s this week’s: what emoji best describes this week’s Fed meeting?
We could get carried away [Ed: the aubergine is banned], so perhaps we should go with the monocle emoji. You know, a bit sceptical, curious, and all a bit sophisticated. Because this week’s decision was a bit… weird.
On the one hand, the cut rates. It told us the precarious would probably justify back-to-back cuts this year, a bolder signal than many had expected.
Yet officials also upgraded their growth and nudged down their predictions. Powell repeated his now-familiar mantra that the jobs slowdown is primarily down to immigration – and fewer workers – rather than tariffs – and lower hiring demand. He said the Fed needn’t be in a rush when asked why officials didn’t cut rates by 50bp this week.
The easiest way of squaring that rather peculiar circle, as James Knightley explained in his reaction piece, is that the Fed thinks its rate cuts will be enough to keep the US economy humming along.
There’s plenty to debate in all of that, but it is true that even without rate cuts, it’s still not totally clear how weak the US economy really is right now. A quick glance at the PMIs, which we get next week, points to respectable growth. And real consumer spending growth – another of next week’s key releases – has slowed, but not disastrously so. It’s running at 2% on an annual basis, down from 3% in much of 2024.
But there are signs that could change. James K highlights the housing market, where prices have fallen for the past four months, having risen consistently since aggressive rate hikes prompted a modest correction through 2022. That has all the makings of a major headwind for consumer spending, in an economy where housing is the largest segment of household wealth.
Then there’s the tariffs, where so far, revenue hasn’t been as high as you might think. My spreadsheet is telling me the average tariff rate across all American imports is 18% right now. Yet the actual effective tariff, if you divide the tariff money coming into the Treasury’s coffers by the value of imports, is considerably lower. There are a whole host of reasons as to why that could be, but most think it’s only a matter of time before those revenues catch up.
For now, though, that might help explain why goods inflation, though rising, hasn’t surged so far. Next week’s core PCE deflator – the Fed’s preferred measure of inflation – will probably look fairly benign. And it’s why the pressure on the US economy could still continue to build: more inflation, but also more pressure on the demand side of the US jobs market.
A difficult backdrop, but one which suggests markets are right to be pricing a little more easing than the Fed’s latest ‘dot plot’ intimated this week. We’re predicting two more cuts this year, and two in 2026.
Over here in Europe, the growth data also looks surprisingly “OK.
Markets Eye the Fed After Peculiar Rate Cut and Powell’s Cautious Tone
