Fed's 'inflation tolerance' key; Powell to testify this week

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FED'S 'INFLATION TOLERANCE' KEY; POWELL TO TESTIFY THIS WEEK

The Federal Reserve's "inflation tolerance" may be key right now, UBS economist Jonathan Pingle writes in a note, as investors try to assess the outlook for U.S. interest rates this week.

While Fed Chair Jerome Powell is due to testify before the U.S. Congress on Tuesday and Wednesday, Fed Vice Chair for Supervision Michelle Bowman on Monday said that the U.S. central bank should consider rate cuts soon. She is growing more worried about risks to the job market and is less concerned tariffs will cause an inflation problem.

The comments follow Powell's comments last Wednesday that policymakers expect inflation to rise over the summer due to the Trump administration’s tariffs. The U.S. central bank left interest rates unchanged last week.

Citing the June SEP (FOMC Summary of Economic Projections), Pingle wrote that "most FOMC participants seem willing to tolerate above target inflation rather than risk even worse labor market outcomes."

Aside from the impact of Trump's tariffs, investors are also closely watching oil prices and Iran's response after the U.S. joined Israel in the conflict, by bombing some nuclear sites in Iran.

While oil prices are easing on Monday, Iran has threatened to close the Strait of Hormuz, through which about a fifth of global oil supply flows.

(Caroline Valetkevitch)