Powell Speak – Rate cuts have to wait till clarity on trade policy

10 Mar 2025 , 09:48 AM

WHY THE POWELL SPEECH MATTERS?

In the US, the tone of monetary policy is not only set by the Fed statement and the Fed minutes, but also by the speeches delivered by the Fed chair and the key FOMC members. While most FOMC members express their personal views in these speeches, an aggregated picture gives you a rough idea of which way the Fed thinking is veering. As the US Fed readies for its upcoming monetary policy statement on March 18, 2025; the big question is whether they will take up the first rate cut of 2025? There have been some data flows that appear to be conducive to a rate cut. While GDP growth has stayed robust at 2.3%, the latest unemployment data showed a spike to 4.1%, even as non-farm payroll additions were limited to just 1,51,000 jobs. It is in this context that the Fed chair, Jerome Powell, delivered his speech on monetary policy at the Chicago Booth Business School.

WHAT JEROME POWELL SAID ABOUT ECONOMIC GROWTH

According to Jerome Powell, the US economy continued to expand at a robust pace, with 2.3% growth recorded as per the second estimate of Q4 growth. More importantly, this growth story had been supported by robust consumer spending. However, according to Powell, compared to the second half of 2024, the consumer spending appears to have moderated, largely due to the uncertain economic outlook amidst the likely global impact of Trump tariffs. However, Powell also underlined that despite some intermittent concerns over GDP growth and labour data around August last year, the concerns over hard landing of the US economy do not exist any longer. That is the good news. Also, on the labour front, the unemployment has been in a range of 4.0% and 4.1%. While non-farm payroll additions were low in February at just 1.51 lakhs, the average non-farm payroll addition since September 2024 is relatively healthy at closer to 1.91 lakhs.

INFLATION – PRESENTLY VOLATILE, BUT FUTURE PERFECT

In his speech at Chicago Booth, Powell specifically underlined that the rate of Inflation had fallen sharply from the mid-2022 levels of well over 7%. Ironically, the sharp fall in inflation happened without either impacting GDP growth or employment, which is not something you get to see too often. Normally, inflation control comes at the cost of an economic slowdown. However, despite warnings from an inverted yield curve, the growth impact of inflation has been limited. In recent months, the consumer and PCE inflation in the US had shown a tendency to diverge from the 2% target. Clearly, even the quarterly projections have admitted that the ride to 2% inflation was going to be bumpy with the last mile inflation being a lot stickier than expected. Recent PCE inflation reading at 2.5% has raised some concerns, especially with core inflation at above 2.6%. Clearly, the higher tariffs imposed by the US on China and its neighbours, apart from reciprocal tariffs are likely to put pressure on US inflation.

HOW POWELL EXPECTS US MONETARY POLICY TO EVOLVE?

According to Powell, in the coming months, monetary policy could get impacted by broad policy changes pertaining to trade, immigration and fiscal policy under the Trump administration. For instance, Trump has promised to come down heavily on illegal immigration and on countries which are exporting to the US with low tariffs but are not reciprocating with low tariffs on their side. Both the immigration policies and trade policies of Trump are potentially inflationary. Hence, they are likely to have a lasting impact on monetary policy in the coming months. Powell has also pointed out that at the current juncture it is essential to separate the trend from the noise. That means, the Fed may maintain status quo in March and worry about rate cuts in the next meeting, by which time there should be greater clarity on the trade policy front. That would offer a good platform for the Fed to formulate a clear monetary policy approach!