Ellen Zenter on Fed Rate Decisions, Tariffs, and the Next Fed Chair

Fed Rate Decision Outlook

• 📌 The latest core PCE data showed a slight increase, with annual inflation at 2.3% and core inflation at 2.7% year-over-year.
• ⚠️ Despite some Fed members favoring shorter-term trends, today's data is likely insufficient for the Fed to alter interest rates at the July meeting.
• 🎯 Consensus for a rate cut is not expected until after more clarity on tariffs and trade impacts is obtained.

Future Rate Cut Predictions

• 📉 Morgan Stanley's institutional side predicts no rate cuts until March, followed by seven cuts in the following year.
• 📊 This forecast is contingent on continued economic slowdown, falling inflation, and a rising unemployment rate.
• ⏳ Arguments for earlier rate cuts are growing within the FOMC, but consensus is unlikely before July.

Impact of Tariffs on Inflation

• 📈 Companies may be absorbing more of the tariff costs, potentially hitting margins and leading to layoffs.
• ⚠️ This absorption could lessen the inflationary impact of tariffs, a point some Fed members might consider.

The Next Federal Reserve Chair

• ❓ The market is anticipating a potential change in Fed leadership, with J. Powell's term ending in May.
• 💡 Several potential candidates are being considered, but the market's reaction will depend on whether the nominee is perceived as independent or a mouthpiece for the president.
• ⚖️ The bond market may react negatively to a Fed chair perceived as not giving careful consideration to economic needs, potentially raising term premiums.
• 🏛️ The Senate will ultimately need to approve any new Fed chair nominee.