Jerome Powell’s recent testimony addressed the current state of the economy and inflation concerns. He noted that markets are digesting challenging circumstances and acknowledged the benefits of the dollar as a reserve currency. Powell commented on the fluctuating USD, accepting that tariff impacts on inflation could vary from expectations.

The bond market is reportedly operating well, but Powell is waiting to see how inflation measures evolve. He suggested tariffs may cause a one-time inflation event and warned of long-term costs if inflation predictions are incorrect. Currently, stagflation is not anticipated, yet its occurrence could complicate the Federal Reserve’s position.

Monitoring Economic Conditions

Powell avoided extensive forward guidance, citing the need to move cautiously amid uncertainty. He observed that the economy is growing and inflation remains stable, while closely monitoring the labour market. Despite his comments, the market’s response has been minimal, with predictions of a 60.6 basis points easing by year-end.

What has already been discussed here is fairly straightforward, though the subtleties are easy to miss. The chairman’s remarks pointed to a central dilemma faced by monetary policymakers — that data are stabilising in some areas while remaining unresolved in others. Inflation isn’t behaving erratically, but it’s not returning quickly to desired levels either. Market participants should pay close attention to the framing — describing inflation as “stable” does not imply satisfaction. Rather, it signals a desire to observe further before intervening.

The comments on tariffs hint at the risks of undervaluing temporary price shocks. If these are misread as longer-term trends, policy moves could be overly aggressive or delayed. That distinction is critical. A one-off spike in prices owing to import levies does not justify the same response as embedded inflation expectations shifting across the economy. That’s likely why we’re choosing to take a measured approach now. Once business conditions adjust to new price levels, the initial spike rarely leads to runaway dynamics — unless, of course, confidence starts to waver.

As for the greenback, the remarks made clear that Powell remains aware of its broader role, though he didn’t linger on it. Still, acceptance of currency volatility implies some tolerance for inevitable realignments. For rate traders, that suggests fewer surprises when calculating medium-term moves. Currency value shifts tend to spill over into related rate markets, albeit not always linearly. Where exchange rate swings touch on imported goods and headline inflation metrics, decision-making becomes harder — which underscores current hesitations.

Reassessing Monetary Strategies

On the subject of the US sovereign debt market, the chairman’s reassurance feels intended to settle nerves for now. In practice, good functioning doesn’t equate to smooth sailing if long-dated yields remain sticky. Traders will probably want to scrutinise auction participation ahead of any upcoming issuance windows. Bid-to-cover ratios and indirect demand will be important. If investor confidence in rates policy begins to drop, that deterioration may not show up first in equities — it will surface quietly, through higher term premiums.

Stagflation, though dismissed at this stage, was named, which rarely happens by accident. Such a scenario introduces challenges, as it ties the hands of those setting rates. That this was mentioned at all signals awareness of potential downside risks, albeit distant ones. For our strategies, it’s a flag to reassess hedges across inflation-linked instruments and to be wary of any late-cycle economic slowdowns.

The absence of forward guidance marks a shift from previous styles of communication. Instead of laying out clearly what’s to come, the central bank appears more committed to steering by data than to shaping expectations. This is likely to result in shorter visibility on policy intentions. We’ll need to watch inflation reports and labour market reads more intently — waiting for policy cues is no longer enough.

With swaps markets now implying just over 60 basis points of cuts by December, it’s worth investigating whether those assumptions reflect healthy scepticism or a repeat of earlier cycles of optimism. The macro data doesn’t yet push us decisively in either direction. But the lack of market reaction to Powell’s cautious tone says something: traders may not believe more cutting is coming. Or they may suspect other tools will be used first.

We continue looking for signs of stress in short-term funding, as this usually precedes more reactive measures. Nothing’s broken, but nothing’s resolved, either. The next few weekly prints — especially core inflation and jobless claims — will be the real test. Positioning should remain nimble, with duration exposure limited and priced to account for near-term ambiguity.

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