The “labor over inflation” model?
The markets are currently reflecting expectations for potential rate cuts, even in light of recent improvements in inflation data, cooling rent growth and declining oil prices. However, the Federal Reserve has adjusted its inflation targets, primarily in response to the trade war and the anticipated shortages of certain goods if agreements are not reached.
A critical point to monitor will be whether Powell addresses the possibility of implementing additional rate cuts if the labor market shows signs of strain due to the prolonged trade conflict. The latest jobs report represents a baseline that may not fully capture the effects of recent events, and as time progresses without a resolution, there is a potential for increased labor market pressures, especially considering federal government job reductions and the impact of budget cuts on economic circulation.
Should the Fed show a readiness to intervene if jobless claims rise, coupled with insights from Fed presidents engaging with companies and CEOs regarding workforce adjustments, it can lay the groundwork for a more dovish Fed to cut rates. Furthermore, if the focus remains on preventing sustained inflation linked to tariffs or shortages, this may influence the bond market in a negative way.
Fed presidents take their own stands
This week’s meeting is poised to signal a shift among Federal Reserve presidents away from Powell’s position. If Powell takes a more hawkish stance, the question-and-answer session will undoubtedly become crucial. Reporters are likely to probe whether other Fed presidents are beginning to prioritize the labor market over inflation concerns tied to tariffs.
We’ve already heard Fed President Waller assert that he is prepared to adopt a more aggressive approach to rate cuts if the labor market starts to decline. Likewise, Fed President Bowman has recently made it clear that the labor market will be prioritized over inflation in their discussions.
If we continue to see increasing divergence on this topic — in this meeting and others — it could pave the way for a significant confrontation within the Fed, complicating Powell’s role if the labor market experiences setbacks.
Conclusion
While no actions will be taken by the Fed in this meeting, we are on the brink of a fascinating two-year chapter for the Federal Reserve. With Powell’s term set to conclude in May 2026, the path ahead could reveal significant challenges. As the labor market potentially weakens, we might see Powell at odds with some Fed presidents, President Donald Trump and the American public, all of whom will scrutinize his leadership if job growth falters.
Furthermore, the emergence of a shadow Fed president in the coming year could add another layer of complexity to the landscape. So, let’s embrace the role of detectives and closely examine not only the Fed’s actions but also their statements and responses in press briefings, as these will be critical indicators of future developments.
