Beyond July, however, the market only counts on two rate drops by the end of the year.
- We provide that the American federal reserve will maintain its unchanged rates at its meeting on July 30, leaving the target range of Fed Funds unchanged at 4.25% -4.50% for the fifth consecutive meeting.
- The context of growth and inflation justifies a cautious approach to the Fed, but the pressures in favor of a drop in rates are intensifying, both from the Trump administration and certain members of the Fed board of directors.
- Since its last meeting in June, consumer demand has continued to weaken, while inflationary pressures induced by customs duties show signs of intensification. However, the relaxation of financial conditions has helped to alleviate certain risks of slowdown in growth.
- We believe that the Fed could adopt an wait -and -see attitude in July, while continuing to assess the impact of customs duties on economic activity and inflation. The short -term interest rates markets seem to share this opinion, with few anticipation of a drop in rates in July.
- Beyond July, however, the market only counts on two rate drops by the end of the year. We believe that many will depend on the figures of inflation which will be published in the coming weeks, but as the Fed meeting approaches in September, the political pressure in favor of a drop in rates may well have increased considerably, especially if consumer demand and the labor market weaken more than expected.
- From a strategic point of view, we believe that the current macroeconomic and political context is favorable to a recovery in the American rate curve. In the foreign exchange markets, we believe that the US dollar is faced with structural opposite winds, which strengthens our conviction in favor of short positions on the US dollar compared to other currencies.
The first six months of the Trump administration were certainly hectic for political decision -makers, bringing shocks and uncertainty with them. Growth and inflation forecasts for 2025 have fluctuated, the consensus is currently established at growth lower than the 1.5% trend[1] In terms of real GDP and inflation of the consumer price index of 3.4% at the end of the year, a macroeconomic stagflationist environment. The recent American macroeconomic data highlighted the challenges faced by the Fed. Consumer confidence has been shaken, consumer expenses for imported goods being penalized by tariff measures. Real estate activity has also experienced a marked slowdown. However, the job market has proven more resistant than expected. The unemployment rate has remained stable for a large part of the year, even if the overview reveals a slight slowdown in activity on the labor market and a freeze on hiring intentions.
On the inflation front, the favorite indicator of the FED, the heart inflation of the price of personal consumption prices, remains greater than its target of 2.7% in annual shift, and certain signs indicate that customs duties are beginning to repercussions on the inflation of basic goods. Consumer inflationary anticipations have decreased compared to their highest levels for several decades, but remain high enough for the Fed hesitating to lower its rates in July.
On the political level, the president of the Fed, Jerome Powell, is subject to increasing pressure to immediately lower the rates, President Trump also brandished the threat of replacing him before the end of his mandate in May 2026. At the same time, the report of the Fed meeting in June indicates that most participants believe that monetary policy is “well positioned” while waiting for greater clarity and Inflation, while emphasizing the risk that customs duties have more persistent effects on inflation. However, some dissensions are beginning to appear within the Fed concerning the current orientation of monetary policy. In recent weeks, the Governor of the Fed, Mr. Waller, has called for a drop of 25 basic points in July, believing that customs duties will have only one punctual effect on the price level, that the economy has already worked below its potential in the first half and that the risks of deterioration of the labor market are increasing. Other Fed members, however, have expressed their wish not to lower the rates preventively, Mr. Powell himself suggesting that he is careful to observe the evolution of the macroeconomic situation.
We believe that the data argues in favor of a status quo of the Fed in July, but in the absence of a significant upward surprise of inflation data, September could be a “decisive” meeting for a recovery of rate reductions, especially if the data on economic activity and, possibly, overwhelming political pressure force the hand of the central bank.
We believe that this macroeconomic and political context continues to promote titles offering an extension of the American rate curve, the adoption of “One Big Beautiful Bill” highlighting the long -term budgetary challenges faced by the American economy. In a context where the risks of upward inflation cannot be dismissed and where concerns grow as to the future independence of the Fed, we also favor exposure to American tips (Treasury Inflation Protected Securities) at 5 and 10 years. On the exchange market, we remain pessimistic about the US dollar due to the structural imbalances faced by the American economy.
