Powell’s hawkish tilt dents September cut odds; tariffs and deficits seen as inflationary headwinds while growth data complicate the path
Federal Reserve Chair Jerome Powell’s comments reset market expectations for rate cuts, with an explicit emphasis on persistent inflation risks and a willingness to keep policy restrictive for longer. While he stopped short of endorsing further hikes, his assurance that the Fed will act to prevent tariff-driven price rises from becoming entrenched has pushed back the market-implied timing of easing.
Two notable dissents (Christopher Waller and Michelle Bowman) highlighted a live debate on the Committee, while a stronger first print of Q2 GDP at 3% further complicates the case for near-term cuts. Markets repriced swiftly: the front end of the US curve moved higher, the US dollar firmed, and cyclicals such as industrials, energy and materials underperformed.
Commentary from Peter Schiff and Andy Brenner diverged on the near-term policy path. Schiff stressed that tariff-induced cost pressures, large fiscal deficits and ongoing monetary overhang raise the likelihood that inflation remains above target, implying the Fed may ultimately need to tighten further. Brenner acknowledged tariff inflation but argued activity could soften as inventories normalise and employment cools, keeping two cuts this year on the table—conditional on weaker labour data in coming months.
Key market takeaways from the discussion:
- Rate expectations: September cut odds fell meaningfully after the press conference; the two-year Treasury yield rose 6–7 bps intraday.
- Inflation dynamics: Tariffs on inputs such as steel, aluminium and copper lift firms’ cost bases; several large corporates have flagged price hikes and profit headwinds.
- Growth versus prices: A 3% Q2 GDP print is supportive of the “higher for longer” stance, but inventory effects and tariff front‑running may fade.
- Sector performance: Industrials, energy and materials led declines; copper‑sensitive names under pressure as margins are squeezed by input costs.
- Market breadth: Mega‑cap tech strength contrasts with broader equity and bond weakness; the dollar remains firm.
Context on dissents and fiscal pressures also matters. While Powell downplayed direct consideration of Treasury financing costs, elevated deficits and rising interest expense tighten the policy‑fiscal feedback loop. If inflation proves sticky alongside firm growth, the Fed’s reaction function leans restrictive; if labour data deteriorate, the easing camp may broaden.
Reference charts for orientation:
What to watch next
Powell’s “do whatever it takes” language on preventing tariff‑driven inflation persistence elevates the importance of upcoming labour reports and inflation prints. The balance of risks tilts towards a longer policy plateau, with asymmetric sensitivity to upside inflation surprises.
Putting this into practice
- Rates and cash: Ladder term deposits and short‑duration bond exposures to benefit from higher front‑end yields while limiting duration risk.
- Equities: Rebalance away from input‑cost‑sensitive cyclicals (industrials/materials) where pricing power is limited; favour quality balance sheets and stable free‑cash‑flow names.
- Commodities and FX: Stronger USD is a headwind for commodities; size exposures accordingly and consider partial hedges where mandates allow.
- Credit: Maintain up‑in‑quality bias; widening risk rises if growth cools while policy stays restrictive. Avoid heavy exposure to issuers with commodity‑linked input costs and limited pass‑through.
- Scenario planning: Track payrolls and core inflation; prepare for two paths—(a) sticky inflation/higher‑for‑longer, reducing duration and adding USD exposure; (b) labour deterioration, enabling measured duration add on dips.
Bottom line: The Fed is prioritising inflation control over early easing. Tariffs and fiscal deficits add upside risk to prices and downside risk to margins. Positioning should reflect a firmer dollar, higher front‑end yields, and a premium on quality until labour data decisively weaken.