Hawkish Fed
What happened?
At yesterday's FOMC meeting, the Fed updated its economic projections, which now show fewer interest rate cuts for 2026. The Fed lowered its economic growth assumption while raising its estimates for future unemployment and inflation. During the press conference, Jerome Powell struck a hawkish tone, emphasizing the risks of near-term inflation due to tariffs and dismissing claims of economic weakness that would necessitate action.
Source: Fox Business
Why does this matter?
Fed vs. Trump: Powell and his colleagues were dovish when inflation was high and the labor market was strong under Biden. However, they have visibly changed gears as recent inflation has been moderate and cracks have appeared in employment data. Some political dynamics may be at play, as Trump aggressively argues for interest rate cuts.
Powell's legacy: The Fed Chair will leave office next spring and be replaced by a Trump nominee. He has an opportunity to shape his legacy now and appear independent from political interference. It appears he is taking it.
What's the counterpoint?
The US economy is clearly weakening, as evidenced by a long list of recent data points ranging from initial unemployment claims to housing starts and retail sales. There is a risk that the Fed will fall behind the curve, as it takes time for rate cuts to work their way through the economy.
finformant view
Powell's hawkish stance should support front-end yields and with it the US dollar, which finformant already called out as a long at its recent low. The "cost" of this stance may be slower economic growth.