Joseph Purtell, portfolio manager at Neuberger, answers a host of questions which will be on many advisers’ minds, touching on tariffs, oil, and AI.
1. The markets are pricing in the likelihood that the Fed will keep interest rates unchanged at this meeting. Beyond the decision itself, what do you think will be the main message Kevin Warsh will convey regarding the performance of the US economy?
As of writing, the market has managed to price a small portion of a cut into the July meeting, although no hike is both our and the consensus expectation. We expect, in his message on the economy, Warsh will signal overall strength and resilience to the various shocks that would otherwise manage to disrupt growth.
2. Donald Trump has stepped up the pressure on the Federal Reserve to speed up interest rate cuts. To what extent do you think this political context might influence the Fed’s communication?
Thus far, influence has been very limited and we expect this to continue. Warsh himself has been closely guarded about his forward guidance and stressed independence while the other FOMC members have retained that same messaging.
3. The Trump administration’s tariff policy is once again at the centre of the economic debate. Is there a risk that higher tariffs could ultimately be passed on to prices and force the Fed to delay the start of monetary easing?
In recent days, trade policy has again shifted – the Section 122 10% tariffs have expired and been replaced by Section 301 – but we judge the overall forward impact to be muted. Most of the price impact has already passed through since the various legislation began in 2025 and the new tariffs do not materially change the overall burden (although they may increase uncertainty).
4. Conflicts in the Middle East have reignited volatility in oil and other commodities. To what extent can the Fed regard these spikes as a temporary phenomenon, or is there a risk that they will once again fuel inflationary pressures?
Our own estimation, which we believe the Fed shares, is that these oil price shocks are temporary and somewhat mean-reverting in their nature. There is the natural, mechanical impact of higher oil prices on the consumer energy intensive basket, but otherwise second round effects do not appear large, and inflation expectations are broadly contained. Nonetheless, escalation and extended oil price increases are always possible, and a series of temporary shocks begin to not look temporary if they continue for far longer than the market expects.
5. In the US, the impact of supply-side factors is less cushioned than in Europe, with a faster pass-through (leading to higher inflation): could demand-side pressure require the Fed to tighten monetary policy?
The difference in supply-side factors between the US and Europe is highly context dependent. We do see demand side pressure in AI buildout related components which is having an effect on inflation; however, at present it remains small and contained enough so as to not warrant hikes in our view.
6. The independence of central banks is once again at the centre of political debate. To what extent is it important for the Fed to reinforce this message against a backdrop of growing pressure from the White House?
The independence of central banks in general, and the Fed in particular, is fundamental to achieving the best outcomes for the people they serve. The Fed and Chair Warsh appreciate this message and reinforce it often.
7. AI is driving significant investment and strong demand for capital in the United States. Could this dynamic investment cycle help to sustain more robust growth and delay certain decisions by the Fed?
AI is already a driving force in the economy and looks poised to continue its influence. Robust growth (but also increased risk) will be a feature of continued buildout. Whether this necessitates a reaction from the Fed is difficult to discern as it is possible that potential growth will be moving in lockstep with actual growth, implying little to no overheating. The Fed and market will need to assess the trajectory of inflation and labor alongside growth to assess whether any over or under heating is occurring.
8. What implications would it have for Europe and the ECB if the Federal Reserve were to delay interest rate cuts for longer than expected?
In the near term, no meaningful difference. While the global nature of the energy shock induces correlated pressures for the US and Europe, the economies have thus far had a differentiated experience. The ECB has already chosen to raise rates once this year while the Fed is on hold.
9. If you had to summarise the meeting in one key takeaway for investors, what would it be?
Watch for any characterization in the press conference of current monetary policy restrictiveness or lack thereof. Warsh has thus far been closely guarded about forward guidance and his own synthesis of current conditions, but if he believes that monetary policy is currently restrictive then this argues for “looking through” the energy supply shock as opposed to hiking in response.
