Yesterday’s semi-annual testimony by Federal Reserve Chair Jerome Powell before the U.S. House of Representatives did not deliver any significant new insights. Powell reiterated the Fed’s current stance: there is no urgency to adjust monetary policy quickly, and policymakers can afford to monitor the effects of U.S. trade policies on inflation and the broader economy. However, the Fed chair did acknowledge that the inflationary impact of tariffs is now weaker than anticipated in April. This could pave the way for earlier interest rate cuts than markets previously expected.
The hearing took place amid growing signs of disagreement within the Fed. On Monday, Fed Governor Michelle Bowman openly supported a rate cut as early as July—provided inflationary pressures remain contained. Her comments contributed to a weakening of the U.S. dollar. Similarly, Governor Christopher Waller recently stated that the current federal funds rate is likely 1.25 to 1.5 percentage points above the neutral level. Both Bowman and Waller are considered potential successors to Powell, lending their opinions additional political weight.
At the same time, other members of the Federal Open Market Committee (FOMC) are signaling a more cautious tone. The President of the Kansas City Fed emphasized there is no rush to ease policy, while Vice Chair for Supervision Michael Barr noted that the real economy remains robust—an argument in favor of maintaining the current rate levels.
These diverging views are exposing growing divisions within the central bank. A few months ago, the Fed’s consensus appeared solid; now it is clearly fracturing. A heated debate over the justification for rate cuts could erupt as early as July, particularly if upcoming inflation data fail to show a significant tariff-related price impact.
This scenario is fueling market expectations for more monetary easing. Since last week, markets have priced in an additional 12 basis points of rate cuts by year-end. If internal divergence within the FOMC continues to widen, these expectations are likely to rise further. That, in turn, spells more trouble for the U.S. dollar, which could remain under increased downward pressure.
Author: Łukasz Zembik, OANDA TMS Brokers
Disclaimer: The information in this publication is for informational purposes only. It does not constitute financial advice or any other form of recommendation and is general in nature. Before acting on any information herein, independent professional advice should be sought.
Source: CEO.com.pl
