Week ended June 20, 2025: Fed sits tight

WHAT CAUGHT MY EYE THIS WEEK (SO FAR)

The focus this week has mainly been on a number of central bank monetary policy decisions, of which the most relevant were the Bank of Japan, the Bank of England and the Federal Reserve.  Of these, most focus was of course on the Federal Reserve.

Largely to script, none of these central banks changed their monetary policy, as expected.  However, central banks in Norway (surprise cut), Sweden and Switzerland all lowered their policy rates by 25bps, with risk of slower growth from the global trade war largely being identified as the culprit for the two Nordic banks.  The Swiss National Bank shares the same concerns, but is also trying to halt the strengthening of the Swiss Franc as investors flock to the safe-haven asset.

The Fed

The FOMC went largely as expected (FOMC decision here), and the post-decision Q&A with Fed chairman Powell was rather uneventful.  Some pundits even called it boring.  Markets really didn’t move throughout the afternoon on Wednesday, at least not materially.  No new information emerged from either the formal decision or Mr Powell’s press grilling afterwards.   The first two paragraphs in the press release sum up the Fed’s rationale for sitting tight.

“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.”

The Fed is waiting simply because it can.  The U.S. jobs market remains firm, and inflation –  although very slowly trending lower – remains above the Fed’s 2% target. 

Although he did not mention the term “stagflation” at all in the Q&A, it is clear that the Fed is bothered by the potential of inflation reigniting and economic growth slowing simultaneously, largely attributable to tariffs and generally erratic trade policies. The FOMC tweaked its economic projections (here) slightly vis-à-vis the last set of projections released at the March FOMC meeting, reflecting these concerns.  Economic growth was revised downward, and inflation was revised higher.  Mr Powell quite rightly said that tariffs will factor in at some point, even if they lead to only a one-time increase in prices.  He is also right when he said that someone has to pay for tariffs  The likelihood is that tariff bumps will be “financed” three ways (in some combination):

• higher prices for consumers, meaning tariffs get passed on to end users;

• domestic (U.S.) companies that pay more for foreign components of their products (negatively impacting gross margins) eat some the costs of tariffs (negatively impacting their earnings); and/or

• foreign companies exporting to the U.S. pay some of the additional tariff expense to keep their products competitive in the U.S. market.

It’s really very simple – with the U.S. jobs market still showing resiliency, the Fed can afford to wait even as President Trump lambasts “too late” Mr Powell.  I’m not sure if the name-calling is a tactic, or if Mr Trump really doesn’t understand monetary policy and the way that the FOMC works. There are seven Fed governors on the FOMC that vote on monetary policy decisions at each FOMC meeting.  Mr Powell is no “king” in this respect! 

Moreover, even though the Fed might ultimately be proven wrong by waiting, the strength of the U.S. economy provides cover for the committee to wait until they see more clear-cut data as to inflation and jobs (keeping in mind that there are policy lags).  It is ironic that it is some of Mr Trump’s policies which are creating the very problem that the Fed must now confront. 

Not only is it highly likely that some of the tariffs will be paid for by consumers (and hence cause a one-time bump in prices), but the immigration policies of the administration will undoubtedly reduce the official (or unofficial) labour force in the U.S.  Although the immigration policies appeal to the MAGA base, it is potentially problematic because it could lead to wage inflation as companies scramble to fill positions from a smaller and potentially less-willing labour pool. 

Of course, the Fed under Mr Powell’s leadership has been wrong before, most recently when they waited to increase interest rates because they thought that post-pandemic inflation would be transitory, not persistent.  How wrong they were then!  Let’s hope this time they have a slightly better grip of the lay of the land so that Mr Powell doesn’t wear the “too late Powell” moniker again!  The CME FedWatch Tool is projecting two 25bps reductions in the Fed Funds rate this year, one in September and one in December.

The BoE and BoJ

Recall that the Band of Japan is going against the flow of other developed market central banks, gradually tightening (or perhaps the better word would be “normalising”) monetary policy after many years of accommodative policies.  The BoJ did not act at its monetary policy meeting early this week, but did say it would reduce its tapering (meaning slow down its QT) in 2026 because “fresh risks” are appearing, mainly in the form of U.S. trade policies and higher oil prices due to the Israel-Iran conflict. 

The Bank of England also did not change its policy rate at its monetary policy meeting yesterday, highlighting fears that the combination of tariffs and higher oil prices could result in stubborn inflation.  Inflation has been moving up and down in the U.K., although the April jump was at least partially attributable to one-time (annual) adjustments in domestic energy prices.  The BoE’s single mandate is to maintain inflation at 2%.  There was good news for the BoE ahead of their recent policy meeting in the form of May inflation data, with core CPI in May falling to 3.5% (from 3.8% in April).  Forward rate markets are suggesting that the BoE will reduce its policy rate twice more this year, with the first 25bps reduction expected in August.

The U.S. joins Israel in destroying Iranian nuclear assets

I try to avoid geopolitics unless it is a factor in investor sentiment and market direction.  With the U.S. having now joined Israel in their efforts to degrade Iran’s nuclear capabilities, I figure I must as well share my personal views which I posted on X earlier today:

 As I pen this on Sunday evening (Europe), futures look hardly bothered about this escalation, meaning investors' expectations are that – in spite of the rhetoric coming from Iran – the situation will not worsen. Let’s hope that that is the case.

MARKETS LAST WEEK

Aside from Japanese stocks, most major equity indices were weaker last week, with European bourses suffering the most.  This could be because it is European companies and consumers that would be most negatively affected by oil supply disruptions and higher energy prices.  Or it could be attributable to the fact that risk markets have scarcely budged the last couple of weeks, raising questions as to whether or not the host of risks that might confront us – not to mention stretched valuations – are being properly reflected in prices.  I can comfortably say that the risks feel asymmetrical to me to the downside, although positioning against momentum can be very costly if you’re wrong.    

US Treasury yields were slightly better on the week, even with the FOMC standing still as far as its monetary policy decision mid-week.  Total returns for USTs remain marginally positive YtD.  Corporate bond spreads in USDs were more or less flat on the week.

In other assets, Bitcoin followed risk markets lower on the week, and gold lost ground, too. Oil was stronger, now up nearly 22% in the last month due to Middle East hostilities.  The U.S. dollar was flat, and the Yen not surprisingly weakened following the BoJ dovish decision.  

See updated tables in section “Market Tables” below.

WHAT’S AHEAD THAT MATTERS

Key economic data this coming week:

• Preliminary services, manufacturing and composite PMI data for the Eurozone (and France and Germany separately), the U.S., the U.K. and Japan will be released on Monday.  This should provide some information on how the manufacturing and services sectors, and the economies in general, are performing in each country  / economic zone.  

• On Tuesday, the Consumer Confidence Board will release its monthly survey of consumer and business confidence for the U.S. You can find the last update (May 27th) here, for reference. 

• Various home sales data will be released this week in the U.S., a potential indicator of consumer comfort in taking the plunge in housing.

• For Japan, preliminary CPI for June and unemployment data for May will be released on Thursday, important as the BoJ confronts risks on the horizon that might affect their normalisation of monetary policy.

• PCE data for the U.S. for May – the Fed’s preferred measure of inflation (albeit very lagged) – will be released on Friday.

• Perhaps the most interesting thing this coming week will be what the various Fed officials on the circuit might say, including potentially providing more colour on the recent FOMC decision.  It will be interesting to see if there are material differences in views amongst the various Fed governors and officials.  

• The “head honchos” of the Fed and ECB – Chairman Powell and President Lagarde – will both be speaking.  Mr Powell will provide Congress with his periodic update as to the U.S. economy on Tuesday (House) and Wednesday (Senate), always interesting because it is mainly Congressional grandstanding.  Mme Lagarde will be accepting an award on Tuesday in Brussels, so will be speaking then.

Treasury note auctions this week

Although the U.S. Treasury bond market has settled and is trading in a narrow range albeit at elevated yields while the “big beautiful bill” sits in the Senate, there are several UST securities auctions this week that will be watched.  There are no 10-year or longer auctions of U.S. Treasury bonds, but investors will be focused on the auction of $70 billion of 5-year notes on Wednesday and $44 billion of 7-year notes on Thursday.

Upcoming central bank policy meetings are as follows:

• ECB: July 23-24 (likely to pause until September)

• FOMC: July 29-30 (no change expected; two 25bps reductions expected September and December)

• Bank of Japan: July 30-31 (no change expected; recall BoJ is in tightening cycle)

• Bank of England: August 7 (25bps reduction in Bank Rate expected)

MARKET TABLES

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