Summertime data to pave way for Fed rate cuts, or further conflict with Trump

Reuters

4 hours ago

WASHINGTON, June 27 (Reuters) - An unexpected pickup in underlying inflation last month nudged price pressures further from the Federal Reserve's 2% target, putting this summer's data in the spotlight for whether the central bank can resume cutting interest rates and ease ongoing tension with President Donald Trump.
Friday's Commerce Department data painted a potentially worrisome picture for Fed policymakers. Personal spending and income both dropped in May, a possible sign of weakening economic growth, while core inflation increased at a 2.7% annual rate, faster than in April and higher than anticipated. Overall inflation, used to set the Fed's inflation target, grew more modestly at 2.3%, but still moved away from target, and April's rate was revised higher.
Investors initially keyed on the spending weakness, boosting bets the Fed would cut rates by 75 basis points this year, faster than Fed policymakers project.
With households pulling back after a surge of preemptive buying to avoid Trump's import tariffs, "I think the real worry here is personal income and spending moving lower," said Peter Cardillo, chief market economist at Spartan Capital Securities. "All signs point to a weakening economy."
The report, though, provided little clarity for Fed policymakers worried inflation pressures may build in coming months in response to Trump's import taxes, not all of which are fully set.
"The report is a wash for the FOMC and won't alter its wait-and-see stance," wrote Sal Guatieri, senior economist at BMO Capital Markets. "The slightly warmer core price increase doesn't settle the debate about how much tariffs will impact inflation."
Ahead of their September meeting, Fed officials will receive reports on consumer prices for June, July and August that Fed Chair Jerome Powell this week said should show whether tariffs are flowing through to consumer prices, as many economists anticipate, or whether those concerns prove overblown. In addition, jobs reports for those three months will show whether the labor market remains solid, or whether slowing job growth and rising joblessness offer a different reason to consider cutting rates.
Referring to the Fed's current outlook that inflation is about to rise due to tariffs, Powell in a hearing before the House Financial Services Committee on Tuesday said "we should start to see this over the summer, in the June number and the July number...If we don't we are perfectly open to the idea that the pass-through (to consumers) will be less than we think...That will matter for policy."
It could also figure into Trump's approach to Powell's final months as Fed chair, with his term ending in May 2026.
The Fed's benchmark rate has remained between 4.25% and 4.50% since December. Trump has said repeatedly it should be much lower and is angered by Powell's approach.
Trump and his aides have mused since last year about naming a successor earlier than usual, hoping the nominee could exert pressure on Powell through public comments that try to steer other policymakers or financial markets toward different outcomes.
It is an untested strategy, and not without risks.
"Would I put any weight on a shadow Fed rates strategy that deviates from what Powell has articulated? Not really," said Ed Al-Hussainy, senior interest rate and currency analyst for Columbia Threadneedle. The "big caveat," he said, is that "market psychology could shift meaningfully in some unpredictable way," and not necessarily in ways beneficial to the economy or Trump.
"The reward strikes me as very small, and the risk very large," said Michael Strain, director of economic policy studies at the American Enterprise Institute. "To anoint a shadow chair who spends months and months outside the Fed seems like a bad idea for the president. Odds are it would push up longer rates, not down," if markets began pricing in the implications of a less independent Fed on expected U.S. inflation.
The clock is also ticking on the idea, with just seven Fed meetings until Powell's term expires. Trump does have an opportunity to name a Fed governor in February, when the term of Adriana Kugler expires, but that would potentially add a dissenting voice only a couple of months before Powell's term as chair ends.
Among those thought to be on Trump's short list for chair, the only one currently at the Fed is Governor Christopher Waller, a Trump appointee who is already influential in the policy debate.
Since the time of four-term Fed Chair Alan Greenspan, presidents generally have nominated a new Fed leader in October or November just before the existing chair's term expires, with Senate confirmation following and the new leader assuming office in February. President Barack Obama renominated Ben Bernanke as chair early, in August 2009, while Powell's second term started late, in May 2022, after controversy over other Fed nominees delayed Senate confirmation.
By this year's September meeting, the conversation is likely to have changed, with the Fed either proven correct in anticipating higher inflation, or coalescing around rate cuts as Trump has wanted.
Federal Reserve Bank of Minneapolis President Neel Kashkari said on Friday before the data was released that with little impact from tariffs on inflation so far he is ready to cut in September "barring some surprising development before then." If inflation shows up later, he said, "we could hold the policy rate at the new level until we gained greater confidence that inflation was headed back to our target."