Trump doesn’t have the cards.
The President has gone full-out in a war against Federal Reserve Chairman Jerome Powell in an arm-twisting effort to get him to lower interest rates. He’s also sure to nominate a dove to replace him next May.
There is no telling what the economy will look like a year from now but at the moment it’s impossible to make a case for cutting rates. US inflation has been above target the Fed’s target for the past four years and tariffs are inflationary. Now that could just be a one-time effect but we don’t know yet and with Trump now threatening higher tariffs on a number of countries starting August 1, the risks to inflation and inflation expectations are to the upside.
The best case for cutting rates is that the employment market is turning. There is some evidence of that with continuing jobless claims at the highest since 2021 but at the same time initial jobless claims have slid for three straight weeks after a scare in early June.
That paints a picture where it’s getting tougher to find a job but isn’t a picture of layoffs.
Zooming out to the non-farm payrolls report, it surprised markets in June with a +139K and the trend is relatively stable.
Non-farm payrolls
That contrasts with softer readings from ADP and ISM services but there’s nothing in the official data yet that’s sounding alarm bells.
There is also the huge budget package that Trump and Republicans just passed. It solidifies lower corporate tax rates and allows for accelerated depreciation of investment, something that should lead to business investment and hiring — and even a potential boom. In addition, other moves on the tax side like ‘no tax on tips’ could put more money in consumers’ pockets.
Another Trump policy that could be adding to inflation is immigration. The round up of illegal immigrants is naturally inflationary on the wage side.
Finally, the stock market is at record highs and that should further spur investment, spending and boost consumer confidence.
At the moment, the market is sniffing out some Fed pre-emptive cuts based on a slowing jobs market. I can see the case for a cut or two in the next six months but the market is pricing in 97 bps in easing in the year ahead. Given the state of the economy right now, I think that’s too high.
As it unwinds — and particularly if Trump relents on the trade war — then there are reasons to be bullish on the US dollar.
US dollar index
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