Source: China Fund Reporter, Taylor

Hello everyone, let's pay attention to the latest news from Federal Reserve Chairman Powell regarding interest rate cuts.

Powell: The Fed would have already cut rates if it weren't for tariffs

On July 1, Federal Reserve Chairman Powell stated that if it weren't for the tariff plan introduced by Trump, the Fed would likely have adopted a more accommodative monetary policy by now.

At the European Central Bank Forum held in Sintra, Portugal, Powell was asked during a panel discussion: If Trump had not announced tariffs on numerous foreign trading partners earlier this year, would the Fed have cut rates again? Powell responded, "I think so."

Powell added, "In fact, when we looked at the scale of the tariffs, we decided to hold steady because all inflation expectations for the U.S. rose significantly due to the tariffs."

Powell's remarks indicate that despite increasing pressure from the White House, the Fed is still taking a wait-and-see approach regarding interest rate policy.

Last month, the Fed again kept the key borrowing rate unchanged. The rate has remained in the target range of 4.25% to 4.5% since December of last year.

The Federal Open Market Committee (FOMC) indicated through its so-called dot plot that there may be two rate cuts by the end of 2025. However, Powell stated at a press conference last month that the Fed "is prepared to remain patient."

When asked if it was too early to cut rates in July, Powell said, "I really can't say right now; it will depend on the data."

According to the CME FedWatch tool, federal funds futures traders expect a probability of over 76% that the Fed will keep rates unchanged in July.

During the panel discussion on Tuesday, Powell said, "We are looking at it meeting by meeting. I will neither rule out any meeting nor directly include it in the plan. It completely depends on how the data evolves."

Powell indicated that he expects the impact of tariffs to show up in inflation data over the next few months, while also acknowledging that there remains a lot of uncertainty. "We are watching closely. We expect to see some higher (inflation) readings in the summer."

However, he added that decision-makers are also prepared to respond, acknowledging that these impacts "could be higher or lower than we expect, and could appear earlier or later."

The Fed is caught between predictions and the latest data

The Fed is currently facing an awkward situation: on one hand, its predictions about inflation, and on the other, the latest data that has not yet shown significant pressure.

So far this year, the Fed has not cut rates—despite ongoing pressure from Trump—partly to confirm whether the price increases driven by tariffs will evolve into more persistent inflation. But so far, such increases have not been clearly evident.

Powell said, "We believe the most prudent course of action is to remain patient, continue to observe, and see how these impacts play out."

In June, Fed policymakers unanimously voted to keep rates unchanged again. However, the latest quarterly forecasts show that officials have differing views on the future trajectory of rates.

Ten officials expect at least two rate cuts this year, while seven expect no cuts until the end of 2025, and two only expect one cut before the end of the year.

Trump's imposition of new tariffs on dozens of U.S. trading partners, along with his administration's repeated shifts on specific rates and trade agreement progress, has created uncertainty for the economic outlook. The market generally predicts that these tariffs will increase inflationary pressures and hinder economic growth.

However, from the economic data, there is currently little visible impact of tariffs on either prices or the job market. Trump and several senior officials in his administration have seized on this point, continuing to pressure for a rate cut.

Powell said, "We have always emphasized that the timing, magnitude, and persistence of inflation are highly uncertain."

Two Fed governors appointed by Trump, Waller and Bowman, indicated that a rate cut could happen as soon as this month's meeting. They both mentioned that recent moderate economic data is one of the reasons supporting their views.

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