Waiting for the Fed All Summer Long

Inflation is still lurking, and there’s little point getting out too far in front of tariffs.

John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator at the Financial Times, he is author of “The Fearful Rise of Markets.”

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Today’s Points:

• Tariffs still aren’t driving up US inflation.
• That calmed bonds, but didn’t help stocks — and some famous investors are nervous.
• The US and China have agreed not to go back on what they agreed last month.
• Tensions around Iran are high again.
• AND: Farewell to Brian Wilson. Crazy = Genius.

A Beautiful Inflation Print

The Federal Reserve might as well take the rest of the summer off and head for the beach. If the sweeping new tariffs are to shift inflation upward, they haven’t done it yet. That’s the clearest conclusion from the US consumer price inflation data for May, which against expectation showed continuing decline, and nevertheless changed market expectations for the Fed barely at all.

May was the first month the Trump 2.0 tariffs were in effect throughout, and yet they had a negligible impact on price rises. That is undeniably good news. But it doesn’t disprove that price rises will eventually come, and the data overall give the Fed no reason to jump in either direction.

Breaking inflation into its four main components — food and energy, and the remaining goods and services — in our regular chart from the ECAN function on the terminal shows minimal change. Services continue to dominate, energy was negative and food positive. Core goods, the most affected by tariffs, saw inflation tick up, but not to a level that’s discernible:

The details reveal that the report was not quite as good as it looked. The Atlanta Fed divides inflation into products with flexible prices, and those that are “sticky” — where price changes take a while to execute and cuts are rare. Over the last three months, flexible prices dipped, possibly due to weak demand, while sticky price inflation declined very slowly. The Cleveland Fed’s measure of the trimmed mean, which excludes outliers and averages the rest, ticked upward for the first time this year, and remains above 3% — another sign that underlying inflation pressures remain:

Also problematic for the Fed is an uptick in “supercore” inflation — services excluding shelter — that it has made a priority. Goods’ contribution to CPI, still tiny in aggregate, is rising steadily, even if there hasn’t been the step change that might be expected with new tariffs:

The most politically sensitive prices also continue to inflate. Strategas Research Partners keeps an index of “Common Man Inflation” that covers essentials. This outstripped growth in earnings throughout the Biden presidency, a critical factor in the Democrats’ failure to hold on to the White House. So far under Trump, the price of the basics continue to inflate faster than wages:

There’s further bad news for the lower-paid in the Atlanta Fed WageTracker numbers, based on census data. They show overall average wage growth constant at just over 4% for the third month — but it was kept steady by a fall for people in the lowest quartile of income, the 25% who receive the least pay. However companies are reacting to the problems of the moment, the results seem to be much worse for their lowest-paid employees, whose wages are now rising slower than they were before Covid:

That would argue for lower rates. But another unwelcome development makes that unlikely. The oil price has fallen steadily over the last year — but worrying news from Iran prompted its biggest daily rise of the year.Oil’s short-term downward trend now appears decisively broken, although it remains well below the 200-day moving average that is usually taken as a gauge of the longer-term trend.

Calling the Federal Reserve

The rather downbeat conclusion to all of this is that it’s hard to see why the Fed should make any move for the rest of the summer. Neither unemployment nor inflation are at levels that require drastic action. With uncertainty ahead, particularly over the US-China trading relationship that we cover below, the balance of risks still points toward staying on hold and seeing how the bid to change US trade policy unfolds.

There’s still room for politics. The administration claimed responsibility for falling inflation, but argued for steep rate cuts, as in this vice-presidential tweet:

But it’s hard to find people to agree with this. Instead, expectations are quite clear, and have been little changed since the Geneva trade truce with China last month: No cuts until September, and probably a second in December. May’s CPI had very little effect:

Tariffs create risks for both sides of the Fed’s mandate. If the extra levies aren’t pushing up prices, that may be because they’re crimping demand (possibly visible in falling flexible prices), or driving companies to reduce their activity. It’s possible they’ll be deflationary, in other words. Don Rissmiller of Strategas argues that tariffs “destroy consumer demand, so there’s a case for moving monetary policy to neutral.” But he adds that tariff implementation has been haphazard “so the next Fed rate cut will likely have to wait as well” — probably until the fourth quarter.

Christophe Boucher of ABN Amro Investment Solutions offers this reasoning:

Slow disinflation is not enough to prompt the Fed to change its stance. Only a major downside surprise on jobs data, which seems unlikely, may urge it to cut rates.
Currently, only one trade deal has been made with the UK (not yet effective), and negotiations with China are ongoing, while other countries are still on hold as the July deadline approaches.
If there is a Liberation Day Part 2 where Trump announces widespread tariffs, including a 50% tariff on Europe, the risk of a Trumpcession may resurface.
Consequently, we anticipate that the Fed will wait until at least September before considering a rate cut.

Further, the tariffs already in place might take a while to impact prices. Importers brought forward orders to beat the levies, so the goods on sale last month maybe reflected pre-tariff input prices. So although it should encourage the Fed that tariffs are yet to boost prices, they need to be careful. Troy Ludtka of SMBC Nikko says:

To ensure there is no lagged, tariff-induced inflationary upturn over the next three inflation reports (June, July, August), we expect the Fed will wait until September before cutting.

It isn’t malpractice.

China’s Rare Trump Card

China has emerged from the high-stakes trade negotiations in London with its near monopoly on rare-earth elements still intact as a potent hedge against erratic US tariffs. That’s not great news for risk assets.

These metals, as Points of Return discussed earlier this week, are critical to a wide array of products, from smartphones to fighter jets to nuclear reactor rods. Trump’s announcement that China will resume rare-earths exports, even before the agreement is ratified, underscores how important they are to the US.

Washington built its leverage before the talks with export restrictions on chip design software, jet engine parts, and student visas. But Beijing’s April curb on rare earths hit harder, and not just to the US. While details of Tuesday’s pact remain scarce, Trump’s insistence that exports resume swiftly shows that delays are costly for US companies. This chart highlights China’s dominance, which has expanded over the last decade:

The US has little to no other option, giving leverage to Beijing it will surely not surrender. Already, the Wall Street Journal reports that China has fixed a six-month limit on rare-earth export licenses for US importers, so they are leaving nothing to chance. With Trump’s insistence that tariffs on China will remain broadly higher, Beijing’s caution makes sense. As Capital Economics’ Mark Williams points out, it’s now clear that China has more leverage than many had believed. Any rollback of non-tariff barriers will open a temporary window that is likely to lead to desperate activity:

US firms will try to amass stockpiles of rare earths and Chinese firms of advanced chips. But neither side will bank on that window remaining open: In the long run, both sides will look for alternative suppliers. That’s particularly true when the state of the relationship hangs to such an unusual degree on the judgment of President Trump. A breakdown in the relationship is only a Truth Social post away.

For now, Beijing is expected to maintain its newly established export-control framework, allowing it to reinstate curbs quickly if needed. Bloomberg Economics’ Jennifer Welch explains that these controls enable China to gather valuable information from US and Western firms, which must submit detailed product and supply chain data as part of the process, thereby sharpening China’s understanding of Western weak spots and dependencies.

Beijing’s willingness to weaponize its dominance in rare earths will likely accelerate efforts by others to develop independent supply chains. But those plans for now still look like a long shot. Welch argues that while early US efforts to develop sources of raw ore show promise, building refining capacity will be tougher due to price pressure from China, technical complexity, and environmental risks:

China also banned the export of crucial technologies for rare-earths processing and magnet production in December 2023. Given these obstacles, the diversification effort will take years, leaving China’s export controls a potent tool in their arsenal in the near term.

Meanwhile, investors’ reaction was mixed. A gauge of Chinese stocks listed in Hong Kong rose 1.1% to the highest level since March. The S&P 500 pared initial losses after the better-than-expected inflation data. It closed the day within touching distance of its sixth record high for the year:

The lack of investor enthusiasm may stem from the talks’ limited scope relating to easing some recent non-tariff restrictions. Capital Economics’ Williams argues that wider trade and economic issues that were supposed to be central to negotiations after the Geneva talks have not been addressed. Veteran investor Louis Navellier suggests the market isn’t convinced that an outcome of 55% tariffs on Chinese goods is ideal:

That brought confusion, and the market temporarily dipped into the red, as 55% seems excessively high and could be inflationary. Approval of such a deal would seem unlikely.

Tariffs are still set to remain too high for comfort. This does not ease tension between the superpowers. At best, the London talks produced temporary measures to restore the status quo ante. Investors know that the bar for a lasting solution is much higher.

—Richard Abbey

Survival Tips

RIP Brian Wilson, the motivating genius behind the Beach Boys, who has passed at 82. The tribute song to him released by Panic at the Disco a few years ago is entitled Crazy = Genius, which seems fair. Wilson had mental health problems after the glory years of the 1960s, and the Beach Boys were nowhere near as good when they were without him. Smile, which took him decades to produce, will always divide opinion. But Pet Sounds proves to be a timeless and influential masterpiece; George Martin said there would have been no Sgt. Pepper without it. Give it a listen.

— With assistance from Richard Abbey

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.