This Wednesday, July 30, the FOMC will announce its decision on the benchmark interest rate. The baseline scenario — anticipated both by the markets (judging by the optimism in the S&P 500) and suggested in recent statements by Fed members including Bostic and Harker — is that rates will remain unchanged at 4.5%.
The reason remains the same as before: inflationary risks from higher tariffs. One might ask why a significant effect has not yet been observed; the answer is that much of the impact of the tariffs is still being absorbed by U.S. companies, which have seen their profit margins shrink. But this will not last forever.
According to the Fed’s Beige Book, which compiles information from business leaders in the central bank’s 12 districts, if import cost pressures remain high in the coming months, there is a growing risk that consumer prices will begin to rise more rapidly in late summer. Already in June, U.S. consumer prices rose.
We cannot necessarily expect a significant change in Powell’s rhetoric at his press conference now that the U.S. has reached a trade deal with Japan and a preliminary agreement with Europe and is expected to announce another delay in tariffs on China (originally set to go into effect on August 12).
Starting with Japan, the agreement remains little more than a handshake. The final terms have yet to be finalized in an official document, and, according to inside sources, legal terms and key details are still being negotiated. There is no clear timetable as to when the promised investments will materialize.
The picture for Europe is even more confusing. Nothing has been formally signed, and the so-called “deal” has already provoked negative reactions within the EU. Several member states and industries argue that it is one-sided — favoring Washington — and that Europe has given too much for too little.
Even if both agreements are finally signed, the tariffs will not disappear. That means that price pressures will remain. Sooner or later, companies will stop absorbing the additional costs and start passing them on to consumers. It is therefore too early to say that inflation risks have finally disappeared…
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