The pressure campaign intensifies on Powell to cut rates. Last week’s “trial balloon,” in which a draft termination letter for the Fed Chair was shown to lawmakers, moved markets. The dollar fell (after a five-day rise, see chart below), bonds sold off, and stock indices dropped, then corrected after the White House indicated that there are “no plans” to fire him, for now. Note: his term as Chair ends May 2026. Powell responded in his typical taciturn manner by posting detailed responses to OMB’s questions regarding the controversial Fed HQ renovations on the Fed’s website.

Secretary of the Treasury Bessent is calling for a thorough review of the renovations, and JP Morgan’s Jaime Dimon, along with the CEOs of Bank of America, Citigroup, and Goldman Sachs, all stressed the importance of Fed independence. Goldman CEO David Solomon said, “I think central bank independence, not just here in the United States but around the world, has served us incredibly well. It’s something we should fight to preserve.” Dimon stressed that maintaining continued independence is “absolutely critical.” That doesn’t just mean under Powell, whom Dimon said he respects, but also for whomever eventually succeeds him. Ex-Fed Chairs Bernanke and Yellen, in today’s New York Times, stress the Fed’s role in maintaining the U.S. dollar’s status as the world’s reserve currency (note the aforementioned dollar plunge following last week’s news of the draft letter). Bernanke and Yellen said, “Eroding the Fed’s independence would undercut one of the U.S. economy’s biggest strengths: its ability to attract foreign capital. Investors worldwide have long trusted that the Fed will make tough calls to control inflation.” Foreign capital = buyers of Treasuries.

_{BLOOMBERG DOLLAR INDEX SNAPSHOT – JULY 15}

Next week – July Fed meeting. The futures market and recent commentary by Fed officials indicate another “wait and see” meeting. The data: Last week’s inflation data was mixed. CPI: 0.3% monthly increase (0.2% core increase). This was the biggest rise since January, with gasoline and shelter making up most of the increase. Shelter is a notoriously “lagging indicator” that sometimes “inflates” real CPI. Some scattered tariff-related increases showed up in clothing, footwear, furniture, appliances, and toys. Many economists had been watching for higher tariff-related inflation to show up in June—so far, it’s muted and scattered. Inflation is still fairly tame compared with a few years ago. PPI: Wholesale price increases hit a nine-month low of 2.3% annually, awfully close to the Fed’s 2% target. Service costs actually fell for the second time in three months (remember, that’s been the big driver over the past few years due to labor market tightening). Some goods saw small tariff-related increases, but no big surge. “Four months without producer-price inflation would be unusual under any circumstances, but during the implementation of tariffs, it is remarkable,” said Chris Low, chief economist at FHN Financial.

Jobs: Most of the recent job creation has been in local and state governments and health care, with the private sector starting to run out of steam. The ADP report showed a loss of 33,000 private-sector jobs in June, the first decrease in 2 ½ years. Weak categories: professional and business services along with manufacturing. The “jobs, jobs, jobs” engine may be sputtering, just in time to spur a rate cut in September. Fed officials seem ok with waiting for further confirmation in the July/August reports (which they will have at the next meeting in September) before deciding. This also gives them time to see how the August 1 tariff deadline spurs more trade agreements. The futures market indicates a 60% likelihood of a rate cut in September. For December, it indicates a 67% chance of at least two cuts by year-end. Stay tuned…

By David R. Pascale, Jr., Senior Director at George Smith Partners.