Fed on hold, but for how long?

The Fed remains on hold amid modest inflation gains and political noise around Chair Powell. While CPI rose slightly, shelter inflation eased and consumer expectations softened. With trade deals pending, a September rate cut remains a live possibility.

• US: Modest tariff evidence so far in US inflation data
  
• BoE: Less urgency for faster rate cuts
  
• Japan: Anxious week ahead
  
• Spotlight on next week

Weekly highlights

US: Fed on hold for now, but not for much longer

The June CPI data was the week’s main macro data event, but it was overshadowed by speculation around the search for the next Fed Chair. Media reports that President Trump may imminently fire Fed Chair Powell caused a brief dip in equity prices and a surge in gold prices before the President Trump said he has no such plans. Amid various waves of speculation on this topic our view has not changed: given the timeline involved (Chair Powell’s term as Fed chair ends next May), there is very little to be gained by his early removal. Even as we argue on economic grounds that the Fed should cut interest rates, we see aggressive calls to such effect from outside the Fed as counterproductive. The more the FOMC is openly pressured to cut, the more the perception is being created that if they do eventually cut, it would be because of such pressure, not because the data actually warrants it. Even the perception of a loss of the Fed’s independence is a loss, so in order to avoid it, the FOMC may in fact choose to delay any cuts beyond what otherwise they might prefer. Better to let the data flow alone drive the decision. To us, the conclusion is pretty clear: it is time to calibrate the policy rate lower.

The CPI data was largely as expected. Overall consumer prices rose 0.3% m/m and core prices rose 0.2%. The headline inflation rate accelerated three tenths to 2.7% y/y and the core rate rose a tenth to 2.9% y/y. The evidence for tariff pass through remains, if not outright scant, at least very limited. Perhaps the best evidence was a notable rise in appliance costs. On the other hand, vehicle prices (both new and used) declined again; for the latter, this is a little surprising given the recent firming of auction prices, but the pass through may be delayed. We do expect used car prices to tick higher. On the other hand, as we’ve been stressing for some time, shelter price inflation continues to moderate. Rent of shelter costs increased 0.18% m/m, the least since February 2021 and rent of shelter inflation decelerated another tenth to 3.8% y/y, the lowest since October 2021.

Another piece of inflation good news came from the University of Michigan consumer sentiment survey. 1-year inflation expectations—which surged from 3.3% in January to 6.6% in May—retreated to 4.4%. Long term inflation expectations eased four tenths to 3.6%, both being the softest readings since February.

The next month will be crucial for trade policy; we anticipate multiple trade deals to be concluded over the next few weeks, resulting in much more clarity on tariff levels going forward. Unless tariff rates are set up well above 25%, the Fed should feel confident by September that a 25 bp rate cut is warranted.

BoE: Less urgency for faster rate cuts

This week’s job data included significant revisions resulting in a mixed outlook. However, the broader trend indicates further easing within the labor market. In June, payrolled employees fell substantially by 41k, placing employment 178k below the level observed during the same period last year. Notably, the previously reported sharp decline of 109k jobs in May—initially interpreted as a substantial adjustment—has been revised to a more moderate contraction of 25k jobs. Consequently, while there is a clear weakness in the labor market according to this metric, there is no indication of an abrupt change during the second quarter.

Wage growth continues to moderate but remains elevated. Private sector regular pay grew by 4.9% y/y, down from 5.2%, with much of the increase concentrated in lower-paying sectors. This suggests that the recent rise in the national living wage is still constraining broader pay disinflation. Nonetheless, wage increases are now tracking below the Bank of England’s previous forecast and may remain under its Q2 projection unless a marked acceleration occurs next month.

Meanwhile, June’s headline inflation rose from 3.4% to 3.6% year-over-year, mainly attributed to stronger services. Service inflation held steady at 4.7%, reflecting lagged impact of April’s minimum wage adjustment and National Insurance changes, alongside ongoing nominal wage growth. Although forward-looking indicators including pay surveys and vacancy statistics suggest that these pressures may soon ease, the recent data indicates that the final phase of disinflation could exhibit increased volatility.

The Bank of England is unlikely to consider June's inflation figures to be a major concern, as the bank had anticipated an uneven trend over the summer period. However, given the combination of this inflation data with mixed employment figures, it is unlikely that the Bank will accelerate its rate cuts. Our baseline projection continues to be two further rate cuts this year, expected in August and November.

Japan: Anxious week ahead

Three months ago, Japan’s primary risks were seen as external. Today, the picture has shifted: while domestic consumption still shows some resilience, the key vulnerabilities now lie within. Concerns over fiscal policy uncertainty—particularly the prospect of higher borrowing—have intensified ahead of the July 20 Upper House elections. There is growing apprehension that the ruling Liberal Democratic Party–Komeito coalition may lose its majority.

These elections are widely viewed as a referendum on inflation. Most opposition parties are campaigning on broader consumption tax cuts, contrasting with the coalition’s more limited one-time cash handouts. This narrative gained further traction following a Reuters survey this week, which revealed that businesses are calling for relief through sales tax reductions and deregulation, especially as the impact of higher tariffs becomes more tangible.

We downgraded Japan’s growth outlook three weeks ago to just 0.4% for the year, and now see a realistic risk of contraction in Q2. Trade is turning into a drag on growth, with real imports (5.0% m/m) outpacing exports (3.2%) in June.

Inflation data offers a mixed picture. Headline CPI rose 0.1% m/m sa (3.2% y/y, down 0.3 pp from May), aided by gasoline subsidies. However, underlying inflation remains sticky: the BoJ’s core metric (excluding fresh food and energy) climbed another 0.4% m/m (3.4% y/y, up 0.1 pp). The passthrough to broader categories appears intact—114 of 278 food subcategories hit record highs, one of the largest spikes since 1990 (figure 4). A planned hike in mobile phone charges also pushed services inflation to a six-month high of 1.5% y/y.

These dynamics complicate the Bank of Japan’s path to policy normalization. While we still expect one rate hike this year, our conviction has weakened. That said, unless snap elections are called, a minority government could remain in power—though this would require careful political maneuvering to secure legislative support.

Can the Ishiba administration negotiate more effectively with their opposition than with its international counterparts? Possibly. But we approach the election outcome with considerable trepidation.

Spotlight on next week

• Japan heads to polls amid strong underlying inflation.