In recent days, the stock market has brought myriad summer entertainments to mind: bungee-jumping, roller-coasters, watching a Space-X launch. Thursday it was up, with the S&P 500 hitting a new record high, Friday it was down, as investors digested more tariff-hike warnings from the Trump administration for Canada, the European Union and other U.S. trading partners.
Meanwhile, President Trump again inveighed against current Federal Reserve interest rate policy, and by implication Fed Chair Jay Powell, posting on Truth Social that the FOMC should: “RAPIDLY LOWER RATE” to reflect the strength of the stock market and tariff revenues now coming in to the U.S. Treasury.
And in fact, investors now appear to be buoyed by expectations that the Fed will lower interest rates later this year, to make borrowing cheaper for consumers and businesses, and pump a bit of stimulus into the economy.
U.S. Bank’s interest rate forecast is right in line with what futures markets are indicating, said chief investment officer Eric Freedman.
“The Fed starts cutting starting in the September meeting and probably one more by the December meeting, probably by half-a-percent,” he said.
But it’s not a sure thing that the Fed cuts rates at all by year-end.
Fed Chair Powell has reiterated that rate decisions will be data-driven — by inflation, and employment, its two mandates, said former Fed economist Claudia Sahm.
“Inflation is and has been above the Fed’s 2% target for more than four years. And we’re in a world where the unemployment rate is very low, close to 4%. They want to see confirmation that inflation is coming down before they start cutting rates, and that is going to take some time,” she said.
And keep in mind, Trump’s perennially delayed tariffs are what’s driving inflation risk right now. And many are not set to kick in until August 1 — just six weeks before the September FOMC meeting, said JoAnne Bianco at ETF provider BondBloxx.
“That continues to increase the level of uncertainty to the path for the Fed and how tariffs filter into economic data. The last thing they want to do is cut rates and then see inflation spike,” she said.
Friday, the Wall Street Journal reported that Chicago Fed president Austan Goolsbee said Trump’s latest tariff threats could muddy the inflation-data-waters, and delay further rate-cutting.