Stocks are flying, the Dollar is falling, tariffs haven't hit yet. Why cut rates now?
As 2025 nears its halfway point, a latter-day Rip Van Winkle who might have been napping since the start of the year might think not much had changed. The S&P 500 index, while closing at a new high on Friday, was up an unremarkable 5%.
That, of course, obscures the dramatic swings in between, with a near bear-market 19% decline from February to the lows after the Trump administration's April 2 Liberation Day tariff announcements. Then came an equally dramatic rebound following a pause in tariffs and a retreat from triple-digit levies threatened for China.
But mainly, the first half gave rise to the investment meme of 'Nothing ever happens," insofar as the stock market is concerned. Trade wars and the uncertain impact of tariffs on the economy; fiscal fights over the Big, Beautiful tax bill that resulted in the U.S. losing its last triple-A credit rating; and conflicts in the Middle East, including the U.S. bombing of Iranian nuclear sites on June 22. After all of that, the S&P 500 and the Nasdaq Composite are ending the first half at record highs.
Forget about the proverbial 'wall of worry" that bull markets supposedly ascend. The new belief, 'Nothing ever happens," is actually relevant to stocks and helped induce individual investors to buy the steep dip in April and May, putting a lie to all the hand-wringing. By halftime, the mood had swung back to FOMO, or fear of missing out.
What hasn't changed is the Federal Reserve's policy stance. And yet, despite an ebullient equity market, an accommodative credit market, and a sharply lower dollar—all signs of easy financial conditions—the president has harangued Fed Chair Jerome Powell for failing to slash its federal-funds target range, which has been held at 4.25% to 4.5% since December.
In congressional testimony this past week, Powell reiterated uncertainty about the effect on prices from tariffs, which mostly haven't hit yet. As EY-Parthenon Chief Economist Gregory Daco explains, their impact has been blunted by the front-loading of imports before the levies hit; use of bonded warehouses and foreign trade zones, which can delay tariff payments until goods enter the U.S.; temporary cost absorption by importers; lags in measuring tariff pass-throughs; and absorption of costs by exporters.
Goldman Sachs economists expect just a one-time inflation boost from tariffs, raising the year-over-year core personal consumption expenditure index (excluding food and energy) to 3.4% in December, significantly higher than the 2.7% increase in the latest 12 months for the Fed's preferred inflation gauge reported on Friday. Brean Capital economic advisors John Ryding and Conrad DeQuadros note that the most recent CFO survey, conducted by Duke University and the Richmond and Atlanta Feds, found 41% planned to hike prices while 30% said they would absorb tariff cost increases in the next year.
Goldman's inflation forecast is well above the Fed's 2% target, making it difficult to justify cutting rates now. Yet two Fed governors, Christopher Waller and Michelle Bowman, have said they would consider rate cuts if inflation is stable. The fed-funds futures market is pricing in two cuts of a one-quarter percentage point each by year end, with a 74.8% probability of the first move in September, according to the CME FedWatch site.
Given the uncertain course of tariffs and their inflation impact, the more likely spur for a rate cut would be a deterioration in the labor market. That will put the monthly jobs data to be released in the coming, holiday-shortened week in the markets' focus. The consensus guess among economists is for a 125,000 rise in nonfarm payrolls in June, down slightly from May's 139,000 increase, with the headline unemployment rate continuing to hold steady at 4.2%.
Deutsche Bank economists estimate it may take only a monthly payroll increase of 100,000 to keep the jobless rate steady, below the average gain of 124,000 in the first five months of the year, because of slower labor force growth. With no net immigration flows, only a monthly payroll rise of 60,000 would keep the unemployment rate flat. With deportations, just 40,000 payroll gains would be at break-even.
Given the surge in retirements by baby boomers, RBC Capital Markets Senior U.S. Economist Michael Reid writes that the U.S. needs more workers rather than more jobs. While the labor-force participation rate is historically low at 62.4%, for the prime working age cohort it's near a record high of 83%. Retirees, meanwhile, provide a spending tailwind out of their savings and accumulated wealth.
At record highs, the stock market provides support for these spenders, along with interest income that had been lacking during the zero-rate era. At the same time, credit markets attest to the financial strength of the corporate sector, writes John E. Silvia, the former chief economist at Wells Fargo.
Along with tight corporate bond spreads, the S&P 500's record close indicates easy financial conditions. In particular, new highs in banks and financials point in the same direction. The one big change since the beginning of the year has been the dollar, which has declined by a sharp 10%, yet another easing in overall financial conditions. All of which makes calls for Fed rate cuts puzzling.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Time of India
26 minutes ago
- Time of India
Russia seizes key lithium field in a dare for US-Ukraine minerals deal
Moscow's troops seized it as part of their summer offensive, which has achieved steady gains across Donetsk. Russian forces have seized control of a valuable lithium deposit in the Donetsk region of eastern Ukraine, depriving the country of a critical asset that could have helped support a new economic partnership with the United States. The deposit, just outside the Shevchenko village in western Donetsk, was captured in recent days, according to battlefield maps from independent groups tracking Russian advances through geolocated combat footage. Moscow's troops seized it as part of their summer offensive, which has achieved steady gains across Donetsk. Though relatively small - just 100 acres - the deposit was seen by industry analysts as one of Ukraine's most valuable because of its rich concentration of lithium, a mineral essential for manufacturing advanced technologies such as electric batteries. The United States has designated lithium as critical to its economy and national security. The Trump administration has aimed to tap into Ukraine's vast lithium reserves, some of Europe's largest, through a recently signed landmark agreement granting it front-row access to the country's mineral wealth.
India.com
an hour ago
- India.com
Market Outlook: PMI, Auto Sales, FII Activity, Key Economic Data To Drive Stock Market This Week
Mumbai: Major factors, including auto sales figures, PMI data, Foreign Institutional Investor (FII) activity, and international economic updates, are expected to drive the Indian stock market this week. According to Bajaj Broking Research, several important economic data releases are scheduled between June 30 and July 4 in both India and the United States. India's industrial production data for the month of May will be released on June 30, which will offer insights into the country's manufacturing output. The current account data for the first quarter is also expected to be announced on the same day. On July 1, S&P Global will publish India's Manufacturing PMI for June, while auto companies will release their monthly sales numbers. Later, on July 3, S&P Global will also release the Services PMI, providing a broader picture of the country's economic activity. Globally, key data from the US, such as Manufacturing PMI, jobless claims, non-farm payrolls, and unemployment figures, are expected next week. These indicators could significantly impact global markets. Meanwhile, Indian stock markets ended the week on a strong note. During the week, the 50-share index Nifty rose 525.40 points, or 2.09 per cent, to close at 25,637.80, while the 30-share index Sensex climbed 1,650.73 points, or 2 per cent, ending at 84,058.90. The broader market also followed suit as the Nifty Midcap 100 index rose 2.40 per cent and the Nifty Smallcap 100 jumped 4.30 per cent. Sectorally, the Nifty Metal index surged 4.81 per cent, followed by Nifty Commodities (4.03 per cent) and Nifty Infra (3.37 per cent) as top performers. Analysts attribute the recent rally to easing geopolitical tensions between Iran and Israel and improving global stability. FIIs returned as net buyers last week, investing over Rs 4,423 crore in Indian equities. This was supported by falling crude oil prices, a stable rupee, and improving global risk appetite. Domestic Institutional Investors (DIIs) also remained net buyers, purchasing nearly Rs 12,390 crore worth of Indian equities.
NDTV
2 hours ago
- NDTV
Trump's "Big Beautiful Bill" Clears 1st US Senate Hurdle, A Look At What's In It
WASHINGTON: Senate Republicans voting in a dramatic late Saturday session narrowly cleared a key procedural step as they race to advance President Donald Trump's package of tax breaks, spending cuts and bolstered deportation funds by his July Fourth deadline. The tally, 51-49, came after a tumultuous night with Vice President JD Vance at the Capitol to break a potential tie. Tense scenes played out in the chamber as voting came to a standstill, dragging for more than three hours as holdout senators huddled for negotiations, and took private meetings off the floor. In the end, two Republicans opposed the motion to proceed, joining all Democrats. There's still a long weekend of work to come. The 940-page "Big Beautiful Bill" was released shortly before midnight Friday, and senators are expected to grind through all-night debate and amendments in the days ahead. If the Senate is able to pass it, the bill would go back to the House for a final round of votes before it could reach the White House. Here's the latest on what's in the bill. There could be changes as lawmakers negotiate. Tax cuts are the priority Republicans say the bill is crucial because there would be a massive tax increase after December when tax breaks from Trump's first term expire. The legislation contains roughly $3.8 trillion in tax cuts. The existing tax rates and brackets would become permanent under the bill. It temporarily would add new tax breaks that Trump campaigned on: no taxes on tips, overtime pay or some automotive loans, along with a bigger $6,000 deduction in the Senate draft for older adults who earn no more than $75,000 a year. It would boost the $2,000 child tax credit to $2,200 under the Senate proposal. Families at lower income levels would not see the full amount. A cap on state and local deductions, called SALT, would quadruple to $40,000 for five years. It's a provision important to New York and other high tax states, though the House wanted it to last for 10 years. There are scores of business-related tax cuts. The wealthiest households would see a $12,000 increase from the legislation, which would cost the poorest people $1,600 a year, according to the nonpartisan Congressional Budget Office analysis of the House's version. Middle-income taxpayers would see a tax break of $500 to $1,500, the CBO said. Money for deportations, a border wall and the Golden Dome The bill would provide some $350 billion for Trump's border and national security agenda, including $46 billion for the U.S.-Mexico border wall and $45 billion for 100,000 migrant detention facility beds, as he aims to fulfill his promise of the largest mass deportation operation in U.S. history. Money would go for hiring 10,000 new Immigration and Customs Enforcement officers, with $10,000 signing bonuses and a surge of Border Patrol officers, as well. The goal is to deport some 1 million people per year. The homeland security secretary would have a new $10 billion fund for grants for states that help with federal immigration enforcement and deportation actions. The attorney general would have $3.5 billion for a similar fund, known as Bridging Immigration-related Deficits Experienced Nationwide, or BIDEN, referring to former Democratic President Joe Biden. To help pay for it all, immigrants would face various new fees, including when seeking asylum protections. For the Pentagon, the bill would provide billions for ship building, munitions systems, and quality of life measures for servicemen and women, as well as $25 billion for the development of the Golden Dome missile defense system. The Defense Department would have $1 billion for border security. How to pay for it? Cuts to Medicaid and other programs To help partly offset the lost tax revenue and new spending, Republicans aim to cut back some long-running government programs: Medicaid, food stamps, green energy incentives and others. It's essentially unraveling the accomplishments of the past two Democratic presidents, Biden and Barack Obama. Republicans argue they are trying to rightsize the safety net programs for the population they were initially designed to serve, mainly pregnant women, the disabled and children, and root out what they describe as waste, fraud and abuse. The package includes new 80-hour-a-month work requirements for many adults receiving Medicaid and food stamps, including older people up to age 65. Parents of children 14 and older would have to meet the program's work requirements. There's also a proposed new $35 co-payment that can be charged to patients using Medicaid services. Some 80 million people rely on Medicaid, which expanded under Obama's Affordable Care Act, and 40 million use the Supplemental Nutritional Assistance Program. Most already work, according to analysts. All told, the CBO estimates that under the House-passed bill, at least 10.9 million more people would go without health coverage and 3 million more would not qualify for food stamps. The Senate proposes a $25 billion Rural Hospital Transformation Program to help offset reduced Medicaid dollars. It's a new addition, intended to win over holdout GOP senators and a coalition of House Republicans warning that the proposed Medicaid provider tax cuts would hurt rural hospitals. Both the House and Senate bills propose a dramatic rollback of the Biden-era green energy tax breaks for electric vehicles. They also would phase out or terminate the various production and investment tax credits companies use to stand up wind, solar and other renewable energy projects. In total, cuts to Medicaid, food stamps and green energy programs would be expected to produce at least $1.5 trillion in savings. Trump savings accounts and so, so much more A number of extra provisions reflect other GOP priorities. The House and Senate both have a new children's savings program, called Trump Accounts, with a potential $1,000 deposit from the Treasury. The Senate provided $40 million to establish Trump's long-sought "National Garden of American Heroes." There's a new excise tax on university endowments. A $200 tax on gun silencers and short-barreled rifles and shotguns was eliminated. One provision bars money to family planning providers, namely Planned Parenthood, while $88 million is earmarked for a pandemic response accountability committee. Another section expands the Radiation Exposure Compensation Act, a hard-fought provision from Sen. Josh Hawley of Missouri, for those impacted by nuclear development and testing. Billions would go for the Artemis moon mission and for exploration to Mars. The bill would deter states from regulating artificial intelligence by linking certain federal AI infrastructure money to maintaining a freeze. Seventeen Republican governors asked GOP leaders to drop the provision. Additionally, a provision would increase the nation's debt limit, by $5 trillion, to allow continued borrowing to pay already accrued bills. What's the final cost? Altogether, keeping the existing tax breaks and adding the new ones is expected to cost $3.8 trillion over the decade, the CBO says in its analysis of the House bill. An analysis of the Senate draft is pending. The CBO estimates the House-passed package would add $2.4 trillion to the nation's deficits over the decade. Or not, depending on how one does the math. Senate Republicans are proposing a unique strategy of not counting the existing tax breaks as a new cost because those breaks are already "current policy." Senators say the Senate Budget Committee chairman has the authority to set the baseline for the preferred approach. Under the Senate GOP view, the tax provisions cost $441 billion, according to the congressional Joint Committee on Taxation. Democrats and others say this is "magic math" that obscures the true costs of the GOP tax breaks. The Committee for a Responsible Federal Budget puts the Senate tally at $4.2 trillion over the decade.
