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The "muzzle" of economic data is more difficult to resolve than political pressure!
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Market Analysis]: The "misser" of economic data is more difficult to resolve than political pressure!". Hope it will be helpful to you! The original content is as follows:
The Fed's road to rate cuts has never been a smooth road, but now, this road seems to be even more rugged. Reuters analyst Jamie McGeever pointed out that the real dilemma faced by Fed Chairman Powell is not from verbal criticism or lawsuit threats from U.S. President Trump, but the cluttered signals in the economic data. These "muzzles" make the Fed's decision extremely www.xmh100.complicated, and the timing and reasons for interest rate cuts seem to be shrouded in a fog.
Expectations of interest rate cuts under political hustle and bustle
Trump's public criticism of the Fed is no longer news. He repeatedly demanded interest rate cuts and even threatened to file a "major lawsuit" against Powell, which made the outside world generally believe that political pressure is the Fed's biggest trouble. However, the fact is not that simple. Putting aside political factors, the Fed's internal attitude towards interest rate cuts has actually been clear. The "dash chart" of the June economic forecast summary shows that Federal Reserve officials generally expect interest rates to be lowered by 50 basis points by December 2025, and market traders are betting that September will see its first interest rate cut, and the interest rate futures market even priced nearly 100% of the possibility of interest rate cuts on the September 16-17 meeting.
This kind of market enthusiasm seems unstoppable, but the question is whether economic data really supports such radical expectations? The answer is not clear. Powell has repeatedly stressed that the Fed's decision will be based on "overall data", but the current indicators are like a mess: some data call for early easing of policy, while others warn of high risks in rate cuts. In this tug-of-war between data and expectations, every step of the Fed is on thin ice.
Hidden worries about inflation: core CPI exceeds expectations
JulyThe U.S. inflation data adds more variables to the debate. The overall consumer price index (CPI) rose 2.7% year-on-year, the same as last month, and on the surface it seems to be stable. However, the core CPI (excluding food and energy prices) rose 3.1% year-on-year, the highest level since February, far exceeding the Fed's 2% target. What is even more worrying is that durable goods prices rose 1.7% from January to June this year, the largest six-month increase since 1987 (except during the epidemic). HSBC global economist James Pomeroy warned that upward pressure on www.xmh100.commodity inflation could further intensify as Trump's tariff policy gradually takes effect.
These data suggest that inflation is not www.xmh100.completely controlled. The tenacious performance of the core CPI and the rising trend of www.xmh100.commodity prices have made it difficult for the Federal Reserve to find sufficient reasons for an immediate rate cut. After all, rashly relaxing policies while inflation is still above the target is tantamount to adding fuel to the fire.
The www.xmh100.complex picture of the job market
At the same time, the July employment report is just as confusing. Job growth is far lower than expected, and the job growth data in the first two months also encountered the largest downward revision on record, which undoubtedly sounded the alarm. However, the accelerated wage growth, increased working hours and the only slightly increased unemployment rate have injected some positive signals into the labor market. These contradictory data make it difficult for the market and the Federal Reserve to judge whether the labor market is cooling down or still stable?
The market is obviously more concerned about the weakness in the employment data, and investors seem to believe that the threshold for the Federal Reserve's interest rate cut is much lower than the threshold for maintaining the status quo. However, Powell has made it clear that a significant increase in unemployment rate is a prerequisite for a rate cut. But the labor market after the epidemic has become distorted due to supply problems: employers are reluctant to lay off employees, and Trump's immigration policy has limited the number of job seekers. This makes the unemployment rate data likely fail to accurately reflect economic reality, further increasing the difficulty of the Federal Reserve's decision-making.
The illusion of "prosperity" in the financial market
Judging from the performance of the financial market, the urgency of interest rate cuts does not seem to be obvious. The S&P 500 and Nasdaq are close to historical highs, gold prices have also hit new highs, and corporate bond spreads have narrowed to their lowest levels in many years. These signs suggest that the current policy environment is far from “restrictive”. In this case, if the Fed rashly cut interest rates, will it really www.xmh100.comply with the principle of risk management? Economist Phil Suttle bluntly stated: Preparing to cut interest rates against the backdrop of full employment and accelerated inflation may be a risky move.
Powell's www.xmh100.communication Challenge
For Powell, the biggest problem may be how to explain the Fed's position to the market and the public. If interest rates are cut when the unemployment rate has not risen significantly, the Fed may find it difficult to justify itself. What's more, Trump's political pressure makes every public statement like a thin ice. If the Fed acts hastily due to external pressure, it may damage its independence and credibility. Therefore, patience and prudence are the most rational choices at present.
The choice in the fog: Where will the Fed go?
The Federal Reserve is standing at a critical crossroads. The "muzzle" in economic data makes the reasons for interest rate cuts blurred, and the shadow of political pressure makes every decision full of controversy. The market's expectations for a rate cut in September are almost certain, but Powell and his colleagues need more tenable evidence. Against the backdrop of inflationary pressure, employment data contradictions, and financial market boom, the Federal Reserve may need more time to clarify the signal and find the best time to cut interest rates.
This game not only concerns the future of the US economy, but also tests the Federal Reserve's wisdom and determination in a www.xmh100.complex environment. Faced with the fog of data and the hustle and bustle of politics, can Powell lead the Fed to find a stable path? The answer may gradually emerge in the subsequent economic data and market reactions.
The above content is all about "[XM Foreign Exchange Market Analysis]: The "misser" of economic data is more difficult to solve than political pressure!". It was carefully www.xmh100.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your transactions! Thanks for the support!
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