How We're Preparing for Fed Chair Powell's Testimony With Trump Tariffs in Focus
Here's how we expect the market to react to upcoming comments from the Federal Reserve chair.
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Soon after the opening bell, Fed Chair Powell will start two days of semiannual testimony and you can bet that the market will be interested in his comments about the economy, inflation, monetary policy and any tidbits he may drop about tariffs.
That means we will be monitoring his testimony carefully and sharing our thoughts on it with you later on Tuesday.
Based on recent January data that showed inflation pressures are, at a minimum, remaining sticky, we suspect Powell will largely reiterate his recent post-policy Fed meeting presser comments: the need to see inflation data move back toward the Fed’s 2% target on a sustained basis. As we discussed in Monday’s Daily Rundown video, “sustained” is the word to focus on.
That’s why we think Powell’s comments on Wednesday will be much more interesting and potentially market-moving, since they follow the January Consumer Price Index out at 8:30 am ET that day. As of this writing, the market consensus sees the sequential reading on core inflation rising other than 0.3% from 0.2% in December, but on a year-over-year basis, the January figure is expected to dip to 3.1% from 3.2% the month before.
Here’s the thing: While the year-over-year core CPI data improved considerably in the first half of last year from 3.9% in January to 3.2% in July, it’s been stuck between 3.2% to 3.3% ever since. Should we see a higher-than-expected print on Wednesday for annualized core CPI, our thinking is it will likely push the expected timing for the Fed’s next rate cut into 2H 2025. Currently, the market is vacillating between that next cut being in June or July.
Escalating tariffs will more than likely complicate the inflation picture and rate cut timing. Either on Tuesday or Wednesday, President Trump is expected to announce the reciprocal tariffs he mentioned on Friday. We already have China’s retaliatory tariffs in force as of Monday, which range from 10% to 15% and are applied to crude oil, liquefied natural gas, farm machinery and select other U.S. products. The Trump reciprocal tariffs would impose import duties on products in cases where another country has levied duties on U.S. goods. France and Germany have already shared they would replicate any imposed tariffs.
The more tariff escalation we have, the greater the potential for inflation to remain persistent. Needless to say, we’ll need to see how this plays out and we suspect this is probably what Powell will say today and tomorrow on the subject.
Going into these two days and what they could bring, we will remain owners of the Portfolio’s market inverse ETFs.
