by Blaine Dickason
Senior Vice President
Portfolio Management and Trading
Independence Day may evoke visions of fireworks and parades or perhaps memories of the 1996 summer blockbuster movie where aliens hovered over The White House. While no actual fireworks or aliens were involved, this past Tuesday was probably the most pressing “Independence Day” for our country’s central bank as Federal Reserve Chair Jerome Powell’s political independence was put to the test. After a tense week during which President Trump conveyed his feelings that Powell’s termination could not come soon enough, this Tuesday, the president cleared the air by following up that he had “no intention of firing him.” Both stock and bond markets that had sold off in response to the initial comments quickly rallied following this change of tone.
Despite being apparently saved from termination this week, Chair Powell remains between a rock and a hard place with regards to setting interest rate policy for the rest of the year and until his term as Fed Chair expires in May 2026. Charged by Congress with a dual mandate to ensure price stability and achieve full employment, the Federal Reserve is facing an outlook that will include a yet to be determined inflationary impact from tariffs and slowing economic growth. Each of which would suggest an opposite policy response by setting either a higher or lower overnight interest rate. Without having much time to bask in the glow of the economic soft landing of 2024, the Fed must now weigh the balance of risks between leaning into their inflation mandate (i.e., keeping interest rates restrictive) or cushioning the economy from a possible slowdown with a pre-emptive set of interest rate cuts. Given that inflation has run above their stated 2% target for the last three years and counting, the Fed is leaning towards keeping interest rates in more restrictive territory pending any clear weakening of the post-tariff economic data.
Source: Goldman Sachs, Strategas
Much has been made about the importance and benefit of an independent central bank, especially for the United States with the world’s reserve currency. Market action in bond and currency markets over the past week delivered a real example of possible outcomes if the Fed’s independence were seriously called into question. Typically, higher interest rates lead to a strengthening U.S. dollar as global assets flow into the United States and dollar-denominated assets. In a sharp departure from the typical correlations, in recent days the U.S. dollar weakened in the face of rising interest rates while it appeared Chair Powell’s future was in doubt. This new direction would have set off alarm bells at our Treasury Department, which is charged with funding our federal government at the lowest cost to taxpayers over time.
Jerome Powell, appointed by President Trump as Federal Reserve Chair in 2018, is not out of the woods yet. The Fed will continue to follow its ‘data-dependent’ strategy for weighing its policy choices in the face of unsettled tariff policies and slowing growth. As of this writing, the interest rate markets are pricing in a 67% likelihood that the Fed will cut rates by one-quarter point at their meeting on June 18 with an additional 0.50% of cuts spread out over their remaining meetings in 2025. Starting in the fall, it is highly likely that discussions and jockeying to be Powell’s replacement starting in May 2026 will begin in both private and public settings. With seven years of service and one year remaining in his tenure as Fed Chair, it has been a remarkable period for Jerome Powell and our country’s independent central bank.
Takeaways for the Week
The Federal Reserve’s preferred measure of inflation for March will be reported next Wednesday, April 30 (Core PCE). Current estimates call for +2.6% year-over-year, a decline from the prior month’s +2.8% level
The April employment report will be released next Friday, May 2. Current expectations are for the unemployment rate to remain at 4.2% and for 125,000 net new jobs to be added versus 228,000 jobs added in March