In the words of Bjork\u2019 90s indie hit\u00a0 \u201cOh So Quiet\u201d \u2013<\/p>\n
It’s, oh, so quiet Shhhh, Shhhh, It’s, oh, so still Shhhh, Shhhh, You’re all alone Shhh, Shhh And so peaceful until\u2026<\/em><\/p>\n Until\u2026 that is the question, and considering it is \u2018peaceful\u2019, it’s probably best to review the minutes from the Fed as it is signalling that the quiet time is not far from ending soon.<\/p>\n FOMC: The Pressure Builds<\/strong><\/p>\n The May 6th<\/sup> to 7th Federal Open Market Committee (FOMC) minutes reaffirmed the Fed\u2019s cautious stance, with Chair Powell keeping to the \u201cwait and see\u201d script. But under the surface, the outlook has become more complicated as event risk is getting louder.<\/p>\n Clearly, Trump\u2019s Tariffs have created new complications for the Fed\u2019s dual mandate.<\/p>\n As the minutes note:<\/p>\n \u201cWith uncertainty higher due to \u2018larger and broader\u2019 than expected tariffs, the Committee may ultimately face a more difficult trade-off between its price stability and full employment mandates.\u201d<\/em><\/p>\n And this was well before the Trade Court\u2019s decision that the Liberation Day tariffs are illegal under the Economic Emergency Act of 1977, and then it was subsequently overturned 24 hours later by the appeals court.<\/p>\n The Fed has flagged increased downside risk to real activity and now sees the probability of recession as nearly equal to its baseline forecast. At the same time, inflation risks for 2025 have been revised upward, though longer-term projections remain skewed to the upside, particularly as inflation expectations creep higher.<\/p>\n Seen in these quotes from the minutes:<\/p>\n \u201cThe staff continued to view the risks around the inflation forecast as skewed to the upside, with recent increases in some measures of inflation expectations raising the possibility that inflation would prove to be more persistent than the baseline projection assumed.\u201d<\/em><\/p>\n \u201cMany participants reported that firms planned to partially or fully pass on tariff-related cost increases.\u201d<\/em><\/p>\n To paraphrase Milton Friedman, \u201cTariffs are not a tax on the sovereign, they are a tax on the consumer.\u201d<\/em> And this is what is being missed by government officials and the President himself.<\/p>\n A counterargument to higher cost is that Fed officials suggested there is a chance of weakening demand, lower immigration driven housing inflation, and competitive pricing tactics. Which would feed back into the risk of recession as mentioned above, and signal that the US is entering a new stagflation era.<\/p>\n Seen here:<\/p>\n \u201cSeveral argued that there might be less inflationary pressure for reasons such as reductions of tariff increases from ongoing trade negotiations, less tolerance for price increases by households, a weakening of the economy, reduced housing inflation pressures from lower immigration, or a desire by some firms to increase market share rather than raise prices.\u201d<\/em><\/p>\n On employment, the labour market remains tight but is potentially vulnerable to hiring pauses as policy and trade risks weigh.<\/p>\n \u201cThe labour market was seen as \u2018broadly in balance\u2019 and the unemployment rate as \u2018low.\u2019\u201d<\/em>\u201cParticipants were concerned that tariff uncertainty could lead to a pause in hiring and the labour market to soften in the coming months.\u201d<\/em><\/p>\n Financial market signals were mixed. Several participants noted an unusual pattern: long-term Treasury yields rose even as the dollar weakened and equities sold off, raising concerns about shifting correlations and safe-haven perceptions.<\/p>\n \u201cSome participants commented on a change from the typical pattern… with longer-term Treasury yields rising and the dollar depreciating despite the decline in the prices of equities and other risky assets… [noting] that a durable shift… could have long-lasting implications for the economy.\u201d<\/em><\/p>\n Monetary framework discussions continue as well. The Fed appears to be reconsidering its post-COVID commitment to flexible average inflation targeting (FAIT). The minutes state:<\/p>\n \u201cParticipants indicated that they thought it would be appropriate to reconsider the average inflation-targeting language in the Statement on Longer-Run Goals and Monetary Policy Strategy.\u201d<\/em><\/p>\n An interesting development is putting more rigidity into the mandate currently, suggesting the Fed is looking to \u2018safeguard\u2019 policy changes from external political forces.<\/p>\n Where does this leave the US and the Fed in the short term? Don\u2019t expect any near-term policy change, but the longer the Fed delays, the steeper the eventual rate cuts may need to be as the risks of a tariff-induced recession lead to the monetary brake being released.<\/p>\n The consensus is that by January 2026, a possible 125 basis point will come out of the Federal funds rate, some even are forecasting 175 due to the need to stimulate the economy rather than restrict it. The consensus figure would see the Federal Funds rate landing on the terminal rate of 3.00% to 3.25%, the unknown is when, the size and velocity of reaching this point will be.<\/p>\n It is oh so quiet, but it won\u2019t be for long if the Fed is anything to go by.<\/p>\n","protected":false},"excerpt":{"rendered":" In the words of Bjork\u2019 90s indie hit\u00a0 \u201cOh So Quiet\u201d \u2013 It’s, oh, so quiet Shhhh, Shhhh, It’s, oh, so still Shhhh, Shhhh, You’re all alone Shhh, Shhh And so peaceful until\u2026 Until\u2026 that is the question, and considering it is \u2018peaceful\u2019, it’s probably best to review the minutes from the Fed as it […]<\/p>\n","protected":false},"author":94,"featured_media":711962,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4382,4043],"tags":[],"class_list":["post-711961","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-geopolitical-events"],"acf":[],"yoast_head":"\n