Powell’s cautious stance backed as tariff risks loom
The Federal Reserve is unlikely to cut interest rates at its upcoming July and September meetings, according to a client note from Morgan Stanley. The investment bank said the current stream of economic data supports Chair Jerome Powell’s wait-and-see approach, with inflation risks tied to President Donald Trump’s tariff policy clouding the outlook.
“We expect firmer inflation prints showing more signs of a tariff push over the summer,” Morgan Stanley analysts wrote. “And we see relatively solid upcoming employment reports, with slowing employment gains but no signs of crack that would put the Fed in a hurry.”
Powell, in recent Congressional testimony, emphasized caution, noting that although inflation has moderated, looming trade-related price pressures could complicate the Fed’s decision-making. Analysts at the firm believe the central bank will continue to prioritize data-driven policy, especially with signs of economic softening remaining mixed.
Divided Fed voices add short-term uncertainty
Despite Powell’s conservative tone, not all policymakers are aligned. Fed Governors Michelle Bowman and Christopher Waller have stated they’re open to cutting rates as early as July if inflation data continues to underwhelm. These remarks triggered some market expectations for a possible summer move.
However, Morgan Stanley sees this as unlikely. “Negative payroll prints, rising unemployment, and subdued inflation could trigger a sooner cut,” the analysts noted, “but that’s not our base case.”
They project that inflation will remain sticky over the coming months, especially as the effects of Trump’s recent tariff hikes begin to filter through consumer prices. While unemployment has ticked higher and GDP contracted in Q1, the labor market remains resilient enough for the Fed to stay patient.
Markets brace for potential autumn pivot
Investor focus is now shifting toward September, with expectations for a rate cut later in the year still on the table. Powell’s continued emphasis on flexibility leaves room for adjustments, but clear signals from core inflation and job market softness would likely be required before any decisive Fed action.
Until then, Morgan Stanley maintains that the Fed will err on the side of caution, carefully watching how tariffs, consumer prices, and employment evolve over the summer.
