Hello,
In medicine, they like to emphasise the principle of "Do no harm". In central banking circles too. Fed Chair Jerome Powell is holding off on cutting interest rates because of the potential for higher inflation. Cutting now would risk amplifying the price pressures. But it's a gamble, particularly if tariffs weaken the overall economy and trigger a rise in the unemployment rate.
The Fed's decision to stand pat came hours after President Donald Trump called Powell "stupid" for not cutting rates. As my colleague Mike Dolan points out, Trump's drumbeat of criticism could be counterproductive if a rate cut is what the president wants. One of the Fed's key concerns is that markets, businesses and households will not believe it has the staying power or political support to bring inflation expectations back durably to its 2% target. A rate cut now -- especially with futures markets not pricing in another one until September - would stoke suspicion that the move was forced by the White House.
U.S. inflation data in the coming months will be critical. So far, the numbers have defied fears of an inflationary bump from Trump's tariffs. So when will price pressures show up in Americans' wallets? It's a topic I get into on this week's episode of Reuters Econ World. Listen here.
While the Fed holds fire, other central banks are pushing ahead with interest rate cuts. Indeed, the Swiss National Bank is on the brink of returning to negative rates as it tries to deter investors from pushing up the price of the franc. Norway's central bank also cut, in a surprise move and said there were more cuts to come due to a more benign inflation outlook.
The Bank of England is treading a more cautious path. It is holding interest rates steady as it focuses on risks from a weaker labour market and higher energy prices due to the escalating conflict in the Middle East.
Global energy markets are not yet pricing in worst-case scenarios for the Israel-Iran war but as my colleague Ron Bousso points out -- oil tanker rates are providing a good real-time gauge of the escalating risks.
For oil markets, the central risk remains the blocking or disruption of maritime traffic through the Strait of Hormuz, a narrow waterway between Iran and Oman through which one-fifth of the world's oil and gas consumption flows.
The benchmark daily rate for a 'very large crude carrier' moving oil from the Middle East to China has risen by 40% since June 13, reflecting the higher risk premium tanker owners are now charging to move through the strait.
And finally, Syria has carried out its first international bank transaction via the SWIFT system since the outbreak of its 14-year civil war, a milestone in its push to reintegrate into the global financial system.
Central bank governor Abdelkader Husriyeh told Reuters in Damascus that a direct commercial transaction had been carried out from a Syrian to an Italian bank on Sunday, and that transactions with U.S. banks could begin within weeks.
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