The Federal Reserve left interest rates unchanged at the conclusion of its July meeting.
Two FOC members voted for a 25 basis point rate cut, agreeing with the president that lower borrowing costs may be needed.
However, the rest of the committee is reluctant, with Chair Powell suggesting they might lift their inflation by holding rates steady and at odds with the president.
Now as we count down two jobs Friday and the August 1st deadline for tariffs, labor, and inflation data. being digested.
Joining me this morning is Sonu Varghesy, who's the global macro strategist at Carson Group.
Good morning, Sonu.
Great to see you.
Thank you so much for joining me.
Well, as you can hear behind me, there's an IPO taking place here at the New York Stock Exchange, hence the cheering.
But first and foremost, Powell did say that the Fed would likely be cutting rates already, if not for the inflationary impact of tariffs.
So what are your expectations for the Fed for the rest of 2025?
Good morning, Rey.
Thank you for having me.
Appreciate it.
And it's always nice to see cheering on the floor of the NYSE and especially louder cheering, right?
That's a good thing.
It means hopefully the bull market will continue.
But no, with respect to the Federal Reserve, I think Powell was on balance, more hawkish, and in a nutshell, he said, Look, employment, the labor market is close to their mandate of maximum employment, whereas inflation remains elevated.
And this morning we got the data for core inflation, the personal consumption expenditures index, which is what the Federal Reserve tracks and what they pay attention to, that rose at an annualized pace of 3.1% in June.
Over the last six months.
It's run at an annualized pace of 3.2%.
So the inflation problem hasn't gone away, and I think that is what's pushing the Federal Reserve to wait, and I'm not sure.
Powell is ready to go for a September rate cut, and that's what markets are pricing it as as well.
Yeah, so it's turning out to be quite the busy week as we end the month of July.
You mentioned the core PC figure which came out this morning, but also yesterday we got the release of Q2 GDP, the first read which topped expectations.
But growth is mostly because of imports dropping sharply and not.
Because businesses or consumers are necessarily booming, there is the Wall Street Journal editorial piece called The Weirdest GDP Report Ever summing up how many of us might be feeling about that report.
So given the distortions to overall GDP, how did you read that latest report here?
The economy is slowing.
I think that's the big picture, and I would just amend.
I don't write the op ed pieces, editorials.
I would say that the last two GDP reports were the weirdest ever with net exports, which is exports minus imports, dragging from GDP by about 450 basis points in Q1.
And adding 500 basis points in Q2, that is the most ever since World War II, since we started collecting these statistics.
So yes, it was a very weird number.
What you want to focus on with GDP is actually what is sort of core GDP doing, how much are households spending, businesses investing, and government spending as well.
And there we are seeing a big slow.
Down real final demand is growing at just a 1.2% pace right now.
Compare that to 2023 and 2024, you know, it was growing above 3%, which is why we had 3%, near 3% GDP growth over the last two years, even before the pandemic, right, 2010 to 2019, where we knew growth was slightly below trend.
Real final demand was growing above 2.5%, and we are well below that.
We are closer to 1%, not even 2% at this point.
So yes, there's a slowdown in place.
Yeah, and Sony, maybe you should consider penning a piece for The Wall Street Journal as well talking about the latest data point, but we have to keep in mind that tomorrow is August 1st, a date that we've all been watching, not just for jobs data, but of course the tariff.
So I know that in terms of the latest trade deal with Japan, you said that that was quite telling when it comes to the direction of the administration's trade policy.
So tell us about the latest deals that have been pouring in ahead of midnight today.
I think the last one I saw was South Korea.
I think the big picture is that look, the administration wants to move on.
The rest of the world certainly wants to move on, and they're ready to, you know, sort of sign up for the most part to what it takes to get to that place where they can move beyond any sort of trade chaos, right?
And the administration wants to declare victory and move on.
How they're doing that is they're keeping interest rate tariff rates at a floor of about 15%.
For certain countries it'll be more than that, but our biggest trade partners, including the EU, Japan, and South Korea to an extent, they're going to see tariff rates about 15%.
Now that is not high enough to reshore manufacturing.
It doesn't stop all imports, right?
We're still going to continue importing.
A lot of goods from all of these different places and uh but the reality is that You know that is going to generate a lot of tariff revenue for the federal government, right now I think this gets back to the Federal Reserve and what they're worried about who is paying that cost?
Who is paying the tariff revenue?
Are they foreign exporters, the import price data tells us that that's not the case.
So it has to be somebody on the US side, whether US businesses or consumers.
For now it looks like US businesses. are, you know, taking over most of the cost of these tariffs, but over time it's likely they pass it down to consumers.
Now how long that takes, that's the big question.
It's likely to take several months, and that's why the Fed is waiting on interest rate cuts.
They want to wait till they see how the tariff inflation, if there is any, how that gets passed through from businesses to consumers.
OK, Sou, well, we will have to leave it there, but as always, great talking to you.
Thank you so much for joining us today.
Likewise, thank you.
