Ethenea: Powell stands firm, despite Trump's pressure
Will the US Federal Reserve cut interest rates on 7 May? Politicians are shouting ‘now!’, while the data says ‘maybe’, analyses Luca Pesarini, Chief Investment Officer (CIO) of ETHENEA Independent Investors S.A.
‘In his speech at the Economic Club of Chicago in mid-April, Powell made it clear that he would not be swayed by politicians - even if they were loud and confrontational. The markets understood this: The market-implied probability of a rate cut in May is only eight percent. In the verbal showdown between Trump and Powell, the point clearly goes to the Fed chairman.
As far as the central bank's dual mandate is concerned, the situation is not clear. The labour market remains stable - at least on the surface. Initial jobless claims are not yet showing any signs of stress. The mass layoffs of government workers have not yet spilled over into the broader economy.
More stable inflation, now it depends on the labour market
The gross domestic product figures for the first quarter, published on 30 April, were weaker than expected, mainly due to excessive imports in the run-up to the tariffs. This is not sustainable and the negative effect will decline in the following quarters. And the latest jobs report on 2 May was even stronger than expected. Therefore, there is no rush to cut interest rates for the time being. If the situation worsens, even the Fed could start to reconsider. But only then, not before.
The latest inflation figures gave a small reprieve: the consumer price index (CPI) came in at 2.4%, below the expected 2.6%, while the core rate was 2.8% (expected: 3.0%). This is not a breakthrough, but it is a step in the right direction.
Rate cut only if data are clear
The focus is on the potential impact of Trump's tariffs. Powell was clear: Higher inflation means fewer jobs. Against this backdrop, it does not look like the inflation data will give the Fed the green light to cut rates.
This is unlikely to have pleased Trump - but so far, the Fed has maintained an impression of independence. More pressure from the White House does not increase the likelihood of a rate cut, but it does raise the hurdle for it. If there is to be a rate cut in the near future, it will be with a clear mandate from the data. Anything else would look like a genuflection to the White House - and Powell will want to avoid that.’
