How will interest rates be lowered next? The Federal Reserve will have to wait until after this summer to decide
The Federal Reserve maintained interest rates in June as expected, and the dot plot still indicates two rate cuts within the year. However, Powell stated that subsequent rate cuts need to confirm the impact of tariffs on inflation, while rate cuts also face new obstacles from escalating conflicts in the Middle East and unexpected surges in food prices. Analysts believe that these factors may lead the Federal Reserve to postpone key decisions until after the summer, making the rate cut path more complex and prolonged than anticipated
With the Middle East conflict and unexpected surge in food prices, coupled with the yet-to-be-seen impact of trade tariffs, Federal Reserve Chairman Jerome Powell and his team are facing an exceptionally complex summer. The anticipated path to interest rate cuts may be longer and more winding than expected.
On June 19, at the latest monetary policy meeting, the Federal Reserve decided to hold steady, announcing that the federal funds rate remains at 4.25% to 4.5%. The official statement clearly stated at the outset: "Although fluctuations in net exports have affected the data, recent indicators show that economic activity continues to expand. The unemployment rate remains low, and the labor market remains solid. Inflation is still at a relatively high level."
Although the latest FOMC dot plot shows that most Federal Reserve officials still expect two rate cuts in the remaining four meetings this year, consistent with the March forecast. However, Powell emphasized the need to confirm the impact of tariffs on inflation, casting a shadow over the prospects for rate cuts. He said:
Ultimately, the cost of tariffs must be borne by someone, and part of it will be passed on to end consumers. We know this is about to happen, and we just want to wait and observe for a while to avoid making premature judgments.
As a Bloomberg column stated, we may need to "wait the entire summer" to clarify the direction of monetary policy.
Rising Food Prices: An Overlooked Inflation Threat
Recent U.S. inflation data shows that the impact of tariffs has not yet been significantly reflected, but another risk factor is quietly heating up: rising food prices. Last month, U.S. food inflation rose 0.3% month-on-month, reaching the fastest growth rate since 2021, exceeding the average inflation growth rate of the past five months.
This trend is not only related to tariff pressures; the escalation of the Middle East situation also poses additional upward risks. The market is concerned that Iran may close the Strait of Hormuz as a "desperate strategy," which would not only affect oil flows but also hit the agricultural commodity market. The strait is a major transport point for fertilizer producers in the Gulf region, and Iran is one of the world's largest exporters of urea and anhydrous ammonia. Other fertilizer-producing countries such as Qatar, Saudi Arabia, and Oman also rely on this waterway.
As the Middle East conflict intensifies, futures prices for major crops such as corn, wheat, and soybeans have risen significantly. On Wednesday, wheat prices rose 4.4%, marking the largest single-day increase since July 2023.
Geopolitics and Inflation: The Federal Reserve's Dilemma
Although Powell downplayed the risks of the conflict on U.S. energy prices, this optimistic assurance is difficult to extend globally. Bloomberg economist Ziad Daoud believes that even in the face of tariff uncertainties, the trend of global inflation deceleration still appears solid before tensions escalate:
Tariffs have indeed played a role: suppressing demand, weakening the dollar, and lowering oil prices. But the Israel-Palestine conflict threatens to reverse this trend. Crude oil prices are rising again. If the conflict escalates further, consumer prices will also rise.
Within the Federal Reserve Board, divisions of opinion have become more pronounced over time. The market predicts that by the end of next year, interest rates will be between 3.0% and 3.25%, indicating a larger rate cut than the current Federal Reserve forecast, reflecting traders' concerns about economic growth being greater than those of Federal Reserve officialsSteven Englander of Standard Chartered succinctly summarized the current situation: "Let's take a summer break." Considering Powell's frequent mention of price increases due to tariffs, Englander also believes he may be one of those officials who expect zero or one rate cut this year.
As the uncertainty surrounding the Middle East situation and tariff policies continues, the Federal Reserve's decision-making path becomes increasingly complex. Currently, Powell has chosen to remain patient until geopolitical and trade policies provide clearer signals. For investors, this summer may be longer and hotter than expected
