Fed Chair Powell Signals Cautious Approach to Rate Cuts Amid Tariff-Driven Inflation Concerns#

Powell’s Testimony Highlights#

• Economic and Labor Strength: Powell emphasized that the U.S. economy and labor market remain robust, allowing the Fed to maintain its current policy stance without rushing to cut rates. Interest rates were held at 4.25%–4.5% in June 2025.
• Tariff-Induced Inflation: He noted that tariffs introduced in 2025 are likely to increase inflation, complicating the Fed’s 2% inflation target. Powell stated, “Tariffs are likely to push inflation up,” necessitating a wait-and-see approach.
• Potential for Easing: For the first time, Powell suggested that lower inflation or a weakening labor market could prompt earlier rate cuts, raising market expectations for easing starting in September 2025, though July is deemed too early.
• Market Reaction: Powell’s comments, alongside softer remarks from Fed governors Bowman and Waller, led to a decline in U.S. yields (up to 5 bps across the curve) and increased expectations for accelerated Fed easing. Markets now price in a 60% chance of a 25 bps cut in September 2025.

Market and Economic Context#

• Geopolitical Relief: A ceasefire in the Israel-Iran conflict eased oil supply concerns, with Brent crude prices dropping from $80/b to$68/b. This triggered a risk-on rebound, with the S&P 500 up 1.1% and EuroStoxx up 1.44%, though the S&P remains ~1% below its all-time high.
• Consumer Confidence Decline: The Conference Board’s consumer confidence index fell to 93 from 98.4 in June 2025, with weaker current conditions and expectations reflecting concerns over tariffs and economic uncertainty.
• Currency Movements: The trade-weighted dollar (DXY) approached a year-to-date low of 96.7, with EUR/USD hitting a new high above 1.1631. Sterling also gained (EUR/GBP at 0.853), supported by a risk-on mood despite Bank of England Governor Bailey’s comments on UK excess capacity.
• European Markets: German yields rose (1.3–6.5 bps) due to a €500bn+ borrowing plan for 2025–29 and a Q3 bond issuance increase to €81.5bn from €66.5bn, contrasting with declining U.S. yields.

Broader Implications#

• Global Trade Tensions: Tariffs, including a 10% baseline on U.S. imports and higher duties on Chinese goods, continue to drive market uncertainty, with potential inflationary effects complicating Fed policy.
• European Economic Trends: EU car registrations rose 1.6% y/y in May 2025 but were down 0.6% year-to-date. Hybrid-electric vehicles led with a 35.1% share, while petrol and diesel cars’ share fell to 38.1% from 48.5% in 2024. A new EU gas storage deal extends 90% storage targets with flexible deadlines, enhancing energy security.
• Sentiment on X: X posts reflect mixed views, with @StockMKTNewz noting Powell’s cautious stance and @CalltoActivism warning of tariff-driven inflation risks. Optimism from the Middle East ceasefire boosted risk assets, but tariff concerns persist.

Conclusion#

Jerome Powell’s June 24, 2025, testimony underscored the Federal Reserve’s cautious approach to monetary policy, balancing a solid U.S. economy and labor market against tariff-driven inflation risks. While maintaining rates at 4.25%–4.5%, Powell opened the door to earlier cuts if inflation or labor conditions weaken, with markets eyeing September 2025. The Israel-Iran ceasefire eased oil prices and boosted equities, but global trade tensions and declining consumer confidence highlight ongoing challenges. The Fed’s wait-and-see stance will depend on incoming data, with tariffs remaining a key inflationary wildcard.