by Alex Harding, CFA
Vice President
Equity Research and Portfolio Management
Warning Shots
This week's economic data painted a picture of an economy caught between competing forces, with implications that are keeping Fed officials on edge. While June's CPI report showed inflation ticking up to 2.7% annually from May's 2.4%, there were encouraging signs beneath the surface, with vehicle prices falling during the month and shelter prices rising at their slowest pace in years. Still, Fed officials remain concerned as tariff-sensitive categories such as apparel, groceries and furniture increased. However, the limited impact on prices should give the Fed some breathing room for now as they assess whether this represents the beginning of broader tariff-driven inflation.
Consumer Strength
The retail sales report added another layer of complexity to the Fed's policy calculus. Retail sales rose 0.6% in June, rebounding sharply from May's 0.9% decline and beating expectations of a 0.2% gain. The strength was broad-based, with 10 out of 13 categories posting increases, led by motor vehicle sales climbing 1.2% after back-to-back declines. The resilience extended beyond the headline numbers - Amazon's Prime Day 2025 just wrapped up as the company's biggest shopping event ever, with total U.S. online spending during the four-day event reaching an estimated $24.1 billion, according to Adobe. Bank executives reinforced this view of consumer strength during earnings calls this week, with Bank of America's Brian Moynihan noting "consumers remained resilient, with healthy spending and asset quality" and JPMorgan stated they "continue to struggle to see signs of weakness,” and that "the consumer basically seems to be fine."
Fed Independence
The capital markets delivered a clear message this week regarding the importance of the Federal Reserve’s independence. Reports that the Trump administration was considering removing Fed Chair Powell caused immediate market volatility - the dollar declined 1%, stocks fell and long-term bond yields spiked as investors reacted to seemingly more serious threats of Trump firing Powell before his term ends next year. The warning shot fired from stock and bond investors caused the Trump administration to quickly reverse course and gives credibility to the notion that the market is the loudest voice in President Trump’s cabinet. We witnessed a similar pivot from the administration in early April when stocks and bonds plummeted in response to the “Liberation Day” tariff policy.
Despite the ongoing political pressure, the Fed is likely to maintain its cautious stance to cutting interest rates in the coming months. Currently, the bond market expects the Fed Funds target rate to remain unchanged at 4.25 – 4.50% at least through the July meeting, and possibly into September. Barring a pickup in unemployment, the Fed is unlikely to move aggressively if the inflation picture remains in flux and policy uncertainty persists. This week’s combination of rising inflation, resilient consumer spending data and market volatility around Fed independence creates a tricky environment where Powell and his central bank colleagues will likely err on the side of caution and leave interest rates “on pause” for now.
Takeaways for the Week:
Warning shots were fired by capital markets in response to the Trump administrations threat to fire Powell - making it clear the Fed’s independence is of utmost importance
Stocks continued to climb the “wall of worry” this week and remain near all-time highs
Weekly initial jobless claims (closely watched for signs of labor market weakness) have fallen for five weeks in a row and now sit at a three-month low