In the Rearview Mirror?

Various Federal Open Market Committee (FOMC) members have emerged from the quiet period surrounding last week’s Fed meeting and provided more color on increasingly divided opinions about the path of monetary policy. We noted last week that the infamous “dot plot” revealed a divergence in the number of expected rate cuts in 2025, and this week we were able to put names to dots. Specifically, Governor Waller noted that the next rate cut could come in July, with any inflationary impacts from tariff policy short lived against the greater risks of a slowing economy. Similarly, Governor Bowman remarked that if inflation pressures remain contained, she would also support lowering the policy rate at the next meeting.

Recall that, although the Fed’s median forecast calls for two additional rate cuts in 2025, two of the FOMC members thought three cuts more appropriate, and seven advocated for no more cuts this year. Diverse opinions are important, and the varying opinions on the FOMC are largely in line with the span of outcomes being expressed through the financial markets. That said, Fed Chair Powell continues to make the case for patience amid trade policy uncertainty. Markets, however, are starting to price in a higher probability of an earlier rate cut in July, with a 20% chance versus less than 15% a week ago. We continue to expect one to two cuts this year, with the first in September.

There is nothing in the recently released data that would take the FOMC consensus off the patient course, with some of the data reflecting the policy conundrum the Fed find’s itself in. With growth in personal income and personal spending weak — and negative in the month of May — the economic outlook may be deteriorating at the margin.

Add to this the above-consensus core inflation data, and it is likely that fears of stagflation will keep the Fed on the sidelines through the summer. PCE core inflation, the Fed’s preferred measure, is rising for the first time this year, and goods prices have reverted from being a disinflationary tailwind to a headwind. We can anticipate this kind of pricing pressure to continue as tariff policy is solidified and higher prices work through the channels. 

The One Big Beautiful Bill Act remains a bit of a work in progress and is facing some headwinds. Most recently, the Senate parliamentarian ruled that several of the spending cuts outlined in the bill cannot proceed under this fast-track budgetary process. Further, the Treasury announced this week a deal to remove the Section 899 “revenge tax” proposal — which seeks to impose a special tax on certain foreign corporations owned by foreign governments, like sovereign wealth funds or state-owned enterprises, when those governments discriminate against U.S. taxpayers.

Despite the changes and potential for additional changes or challenges, the Senate aims to pass a version of the bill by July 4 before sending it back to the House and, ultimately, to President Trump’s desk. Time is of the essence, as without a resolution we will again contend with the debt ceiling, likely in August. 

We are seeing a willingness between the U.S. and its trading partners to strike deals, but tariffs will ultimately be higher. For example, negotiations with the U.K. resulted in a deal that will put the average tariff on U.K. imports at a higher level than in March, but slightly lower than what had been announced in April. Negotiations on steel and aluminum will continue, and tariffs on pharmaceuticals remain an open question.

Most notably, this week, we received confirmation from both sides that a framework for a deal with China has been signed. Negotiations remain ongoing, however, and we believe that ultimately, given the strategic competition between the U.S. and China, we will see tariff rates on Chinese imports meaningfully higher than at the start of the year. Talks between the U.S. and Japan, meanwhile, appear to have stalled over U.S. insistence on maintaining 10% universal tariff rates, along with sectoral duties on autos, which remain a sticking point. Europeans are also bristling against U.S. insistence on lowering some of the nontariff barriers. And, today, President Trump declared that he has terminated trade talks with Canada over tariffs on dairy products and a digital-services tax on U.S. tech companies.

While recent reports indicate the administration may consider extending some flexibility to its original early July deadline for the pause, coming weeks are likely to bring a flurry of activity between the U.S. and its trading partners. Ultimately, we expect that tariffs on most of America’s trading partners will be meaningfully higher than they were at the start of the year.