Last week, a series of US economic data showed encouraging signs. Inflation appeared to be easing, consumer confidence rebounded for the first time this year, and the labor market remained stable overall, with the unemployment rate holding steady at a healthy 4.2%.
However, the increase in continuing jobless claims indicated some cooling in the labor market. Despite these mixed signals, the current economic backdrop seems to support the Federal Reserve gradually moving toward a looser policy stance. Yet, Wall Street observers believe that policymakers may still need more signals before implementing any rate cuts.
Former Cleveland Fed President Loretta Mester said in an interview last Thursday, “We don’t really know how the second half of the year will develop.” Although recent “hard data” such as employment and inflation reports are encouraging, “the real question is what will happen in the second half of the year and whether these trends will continue. That’s where we still face a high degree of uncertainty.”
Current Uncertainties
The main uncertainties revolve around the tariff policies announced by US President Trump on “Liberation Day” on April 2nd and thereafter. These policies have caused significant shocks in the market and among businesses. While many so-called “reciprocal tariffs” have been suspended, the 10% benchmark tariff imposed on most countries remains in effect. Trump is expected to inform US trading partners of the unilateral tariff rates they will face in the coming weeks.
Additionally, Mexico and Canada still face tariffs related to fentanyl, and tariffs on the steel, aluminum, and automotive industries remain unchanged. Last week, the United States and China reached a framework and implementation plan aimed at easing trade tensions, but many market observers noted that the agreement lacked details.
Mester emphasized, “The Fed will wait and see until we get more information on the scale and scope of tariffs, their impact on inflation, and the effect of these policies (including the budget bill) on growth and employment.”
Market Expectations vs. Fed’s “Wait-and-See” Stage
Despite these cautious remarks, the market’s confidence in upcoming rate cuts is growing. Currently, nearly 70% of investors are betting that the Federal Reserve will start cutting interest rates in September, up from 60% a week ago. According to CME Group forecasts, as of last Friday afternoon, the market believed that the probability of the Federal Reserve cutting interest rates in July was approximately 25%. However, the market has largely priced in that the Federal Reserve will keep interest rates unchanged at this week’s policy meeting.
Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, said that a significant deterioration in the labor market might be required for rate cuts to occur before September. He also warned that inflationary pressures have not yet completely subsided, especially given the ongoing uncertainty surrounding the impact of tariffs. He noted, “Some people think that tariffs will not bring inflationary pressure. I think it’s too early to draw a conclusion now.” The behavior of importers, consumers, and businesses stocking up in advance in response to tariffs may be affecting current inflation data, with such effects typically taking time to reflect in actual data.
Schutte added that the Federal Reserve is currently in a “wait-and-see stage.” He said, “In my opinion, it’s unlikely that the Federal Reserve will cut interest rates before September, unless you see a significant deterioration in the labor market, and then the question becomes ‘Is it too late?'”
Ryan Wang, an economist at HSBC in the United States, also pointed out that tariffs bring “two-way risks”—although commodity prices may continue to rise throughout the year, early signs of cooling in the labor market may offset some of the upward pressure on prices by pulling down inflation.
While the market is betting that the path of rate cuts will proceed smoothly, Wang warns that the Federal Reserve needs to ensure that inflation does not rise in an “out-of-control way” and that overall economic activity does not deteriorate rapidly. He noted, “A moderate path of rate cuts still requires time to take shape.”
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