Fed Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

The Federal Reserve left policy rates unchanged……..as expected by everyone. The Statement was essentially a copy and paste from the last meeting with the exception of a slight downgrade to the description of economic growth saying, “activity moderated in the first half of the year” from “continued to expand at a solid pace.” The only “drama” heading into 2:00 was how many members of the Committee would dissent. Also not much of a surprise here with Fed Governors Waller and Bowman both preferring a 25bps rate cut, something they have been vocal about over the last month. This is the first time there have been two dissenters since 2020 and 1993 was the last time that two Governors didn’t side with the Committee. The FOMC statement was largely unchanged outside of two areas: “recent indicators suggest that growth of economic activity moderated in the first half of the year”, changed from “…continued to expand at a solid pace”. Also, the statement removed “ has diminished” from “uncertainty about the economic outlook has diminished but remains elevated”, indicating the outlook has not changed much since the last statement. The market reaction was muted with equities essentially unchanged ahead of the press conference. Yields had been pulling back from the morning highs throughout the session and there was some slight steepening of the curve post announcement with the 2yr pulling back to unchanged on the day.  

The Chairman’s prepared remarks were consistent highlighting a resilient labor market that was broadly in balance. He noted that inflation had moderated with the easing of services inflation but highlighted there had been an uptick in goods. Mr. Powell addressed the dissenting votes saying those views were carefully thought out and presented to the Committee and suggested this was one of the "better" meetings. He later said that the dissenters would be releasing some form of communication explaining their stance in the next couple of days.

The Chairman’s initial comments about tariffs were somewhat dovish, saying that a base case could be that the impact would be short-lived. However, much of the rest of the commentary leaned more “hawkish” or really more patient, than the market had been hoping for. He continued to highlight the Fed’s desire to see more data saying it is “still quite early days in assessing the impact of tariffs”. On that front there are still two rounds of employment and inflation data before their September meeting and he highlighted that the Committee has made no decision about that meeting yet.

 One of the more hawkish lines of the day was when he was asked about why the Fed couldn’t look through the impact of tariffs and said he could argue that they were, by not raising rates, which got a chuckle out of the MAC Desk.

 Chair Powell continued to describe monetary policy as modestly restrictive but not at a level that was negatively impacting the economy. Overall, his commentary was very balanced, and he left the Committee with optionality as to timing but made it clear the “next steps we take are likely to be closer to neutral”. In July we said that the Chairman had started to set the table for a rate cut later this year, likening it to putting down the tablecloth and silverware. Today, the fine China was added to the table leaving investors disappointed as they were hoping that appetizers would be served.

Equities pulled back during the press conference with a peak to trough decline of about 1% but major indices only closed modestly lower. You didn't think we'd get through a note without some trade updates did you? Right around the Fed policy decision, President Trump followed through on plans from earlier this month to raise tariffs on Brazilian imports to 50%, up from 10%, citing a national emergency but the source was the administration’s displeasure with the treatment of former President Bolsonaro. In addition, the administration also announced plans for a 50% tariff on “all imports of semi-finished copper products and intensive copper derivative products”, effective August 2. Imports of copper ore are not impacted which was a surprise. A phased tariff on refined copper was also announced, beginning in 2027 at 15% and increasing to 30% in 2028. On July 8 President Trump had previewed the tariff at a cabinet meeting, without specifics. US Copper futures plunged 20% on the news, the largest intraday move on record according to the ING. US copper futures were trading at a premium to London but that is now collapsing on the news. Cooper miners fell sharply including Freeport-McMoran and Southern Copper Corp down 5-10%. 

Within Treasury markets most of the movement happened at the front end with the 2yr ending up 7bps at 3.94%. The 10/30yr only ticked up slightly during the press conference ending up ~4bps. The probability for a September cut shifted to 45% from 60% coming into today but there was only a minor shift in expectations through year end with markets still looking for between 1-2 cuts (see below). The USD index extended its earlier gains ending up 1% closing right at its 100d ma ~$99.60. 

Outside of today’s Fed meeting investors will have quite a bit to digest ahead of the open but earnings from Microsoft and Meta will help them view that through rose colored glasses with both stocks up >5% in the after-market following strong numbers. This evening the Bank of Japan has its rate decision. The global economic data overnight includes China PMI, industrial production/retail sales in Japan/Korea and the preliminary regional CPI reports in Europe. There is also a round of key economic data in the US including claims, the Employee Cost index, personal income and spending and PCE. Earnings will also keep pouring in with two more mega-caps after the close again tomorrow. Keep in mind it is also month end.  Last but not least we'll be on the lookout for some Truths from President Trump about Mr. Three Late because “Too Late” might not be enough in his mind after today. Have a good night!

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