Federal Reserve Decision: Jerome Powell weathers Trump tirade to hold steady on rates

The reality TV president, with his penchant for “will I won’t I” cliffhangers, continues to confuse and confound.

Right now, his yet-to-be-made call on whether the US will attack Iran is leaving the world alarmed AND alert. Maybe Trump can jawbone the Iranian leadership into self-immolation — but until he does, or doesn’t, the world remains in a holding pattern.

On the brink of a Middle East conflagration that could jeopardise up to a quarter of the world’s energy supply, Trump appears to have taken his eye off another cataclysmic economic event — his attempt to completely remake the global trading system.

Very soon, the US will hit the end of its self-imposed 90-day pause on new tariffs, with little to show for it beyond a moment of diplomatic slapstick: the British Prime Minister on his knees in Calgary, scrambling after pages of the UK-US trade agreement outside the G7 venue, shortly before Trump abandoned his fellow leaders.

While Trump is consumed by the Middle East, a legal challenge to his sweeping tariff authority is quietly making its way through the US courts.

Beijing, ever attuned to the long game, must be watching with whatever the Chinese word for schadenfreude is. Trump certainly has what he craves most — undivided attention — but the rest of the world is left hanging.

From an economic standpoint, no one is feeling that more than US Federal Reserve Chair Jerome Powell.

Having left interest rates on hold at 4.25 per cent this week, Mr Powell now finds himself presiding over a central bank drifting further from both arms of its dual mandate: inflation is rising again, unemployment is ticking up, and growth forecasts are softening.

The Fed’s hesitation has infuriated the President but Mr Powell is staying put, battle-hardened to Trump’s slings and arrows — “knucklehead,” “stupid” — and steadfast in preventing another inflation breakout.

“It is a bit uncomfortable for them at the moment,” said NAB chief economist Sally Auld. “They’re moving further away from both of those mandates ... that’s a pretty uncomfortable situation for any central bank to be in.”

Mr Powell made clear that no move would be made until the economic consequences of the latest tariff regime became clearer.

“The effects of tariffs will depend, among other things, on their ultimate level,” Mr Powell said. “Expectations of that level, and thus of the related economic effects, reached a peak in April and have since declined. Even so, increases in tariffs this year are likely to push up prices and weigh on economic activity.”

Mr Powell said it was still uncertain whether the inflationary impact would be a temporary shift in the price level or something more persistent. “Avoiding that outcome will depend on the size of the tariff effects, how long it takes for them to pass through fully into prices, and, ultimately, on keeping longer-term inflation expectations well anchored.”

With Mr Powell not sounding alarmed about growth and still viewing the labour market as broadly balanced, Ms Auld said the Fed had “a huge list of reasons to do nothing.”

The Fed’s own projections now show fewer board members expecting rate cuts this year, a sign the central bank is prepared to sit tight — even as growth slows and unemployment rises.

Holding pattern

The world cannot expect to receive any updraft from the US economy anytime soon, which, for Australia, means it will have to generate its own momentum. Unfortunately, there is little in the way of lift.

Fortunately, Ms Auld said the Reserve Bank of Australia was in a “very different camp” to the Fed, with far fewer constraints.

Inflation is within the target band, unemployment is steady, and the labour market is broadly balanced. “They’re free to move policy back to neutral,” she said.

Still, the broader economy has underwhelmed. Ms Auld sees the domestic recovery as “more tortoise than hare” — a slow and uneven return to momentum.

“The big disappointment has really been the consumer story,” she said, pointing to the persistence of weak household spending despite stage three tax cuts, energy rebates and a rate cut already delivered.

“Perhaps there’s still some scarring from that period when inflation ran ahead of wages,” Ms Auld said, noting it was the first time in decades many Australians had seen their real incomes go backwards.

That experience, she suggested, may have left consumers reluctant to re-engage, even as conditions begin to normalise.

Today’s jobs figures reinforced the relative inertia: the unemployment rate held steady, extending a months-long pattern of stability even as the pace of jobs growth slows. Hours worked rebounded, likely reflecting seasonal quirks around April public holidays.

“The labour market doesn’t feel as tight as it did six or twelve months ago,” Ms Auld said, “but it’s also not ringing any alarm bells.”

Business is also yet to do any heavy lifting and while credit growth has surged, it isn’t translating into investment. “You do wonder where the money is going,” Ms Auld said.

“Everything that we observe in the national accounts is that there isn’t a lot going on in investment.”

Inflation may be one reason: capital outlays simply cost more than they used to.

“Maybe instead of borrowing a million to buy equipment, now you need to borrow 1.2,” she said.

Ms Auld expects the RBA to deliver three further rate cuts this year — in July, August and November — bringing the cash rate down to just above 3 per cent.

That’s at odds with Westpac’s Luci Ellis who believes the RBA is unlikely to rush into a rate cut.

Ms Ellis thinks the RBA will move “cautiously and predictably”: perhaps that’s the best that can be hoped for amid all this volatility.