Federal Reserve chairman Jerome Powell faces a complex challenge: balancing signs of a softening US labour market and slowing economic momentum with the inflationary pressures of President Trump’s tariffs and the exuberance of the financial markets. On Wednesday, Powell announced the decision to hold rates steady between 4.25 and 4.5 per cent, coinciding with Trump’s tariff announcements on copper and Brazil, and revisions to de minimis import arrangements. These tariffs risk fueling inflation, potentially complicating the Fed’s policy decisions.
Simultaneously, the strength of major tech companies like Meta Platforms and Microsoft, buoyed by investments in artificial intelligence, paints a picture of robust financial conditions. Meta Platforms is a technology conglomerate known for platforms like Facebook, Instagram, and WhatsApp. Microsoft is a multinational technology company that develops, licenses, supports and sells software, consumer electronics, personal computers, and related services. Their impressive June quarter results and subsequent share price surges highlight the significant capital flowing into the market, particularly into AI-driven tech stocks.
Despite evidence of a slowdown in private business and consumer demand, the S&P 500 trades near record highs, and speculative market activities are resurging. This market strength, coupled with tariff-induced inflation, complicates the Fed’s response. Powell acknowledges the potential for a one-off inflation rise due to tariffs but remains wary of prematurely cutting rates and exacerbating the situation.
Ultimately, the Fed is hesitant to cut rates prematurely, fearing it may need to hike them again to control inflation. The risk is that, by remaining on the sidelines for too long, a manageable slowdown could escalate into something more severe, particularly if the US economy begins to crack under the pressure of tariffs and inflated financial conditions.
