BMO's Carol Schleif on Fed Rate Cuts, Tariffs, and Economic Outlook

Fed Rate Cut Expectations

• 💡 Jerome Powell indicated that recent economic data might have justified some rate cuts, primarily due to inflation, not economic weakness.
• ⚠️ However, higher tariffs pose a risk, potentially derailing the Fed's fight against inflation if they become a self-replicating problem.
• 🧐 The Fed is adopting a patient approach, awaiting more data, especially from companies during earnings season, to understand the impact of existing tariffs.

Economic Data and Market Obsession

• 📊 The economic data overall has been solid, with sturdier-than-expected growth despite tamer inflation figures (CPI and PPI).
• 🎯 The market's obsession with the timing of Fed rate cuts (July or September) distracts from a closer look at the actual economic data.
• 📈 While the Fed is expected to cut rates eventually this year, the market's strong leaning into this expectation is questioned, as past cuts did not necessarily help intermediate and longer-term rates.

Tariffs and Business Resilience

• 🧩 Tariffs so far have primarily impacted goods, while the economy is largely services-based (70%), making their broad impact uncertain.
• 🛠️ Businesses have shown remarkable resilience, having navigated tariffs since 2018 and the pandemic, demonstrating adaptability without consistent clarity for nearly a decade.
• 🚀 Potential policy shifts, focusing on tax-friendly aspects of new bills, R&D, and deregulation, could unleash growth without significant inflation.

Future Economic Drivers

• 🤖 Emerging technologies like artificial intelligence, robotics, and advancements similar to the internet's impact could significantly boost growth in a less inflationary manner.
• 📉 The bond market will closely watch the price tag of major government spending bills, which could influence longer-term rates more than Fed short-rate cuts.
• 🧐 Concerns about stagflation might be unfounded if the current environment of low inflation and solid growth continues, which would credit the Fed's management.