Powell in no rush to cut

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

The dollar and U.S. bond yields rose while Wall Street mostly fell in an eventful session on Wednesday, as investors digested U.S. and euro zone GDP figures, new tariffs from the White House, and Fed Chair Jerome Powell's press conference after the central bank left interest rates on hold.

More on all that below. In my column today I look at why Brazil may be holding the world's worst hand in the game of trade negotiation poker with the Trump administration. And it's due to politics, not economics. 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

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Surprisingly strong U.S. growth figures and Federal Reserve Chair Jerome Powell's press conference were the chunkiest morsels for investors to get their teeth into on Wednesday, but they had plenty else to feast on. 

Investors had upbeat euro zone growth figures, a rate decision from Canada, and new U.S. tariffs on India, Brazil and copper imports on their plate, and if that wasn't enough, after-the-bell earnings from Meta and Microsoft for dessert. 

The overarching message that investors took from Powell's press conference after the Fed left its fed funds target range at 4.25-4.50% was this: the central bank is in no rush to cut rates, despite the rare dissent from two policymakers to do so.

Powell said the labor market is strong and effectively at full employment, so that side of the Fed's dual mandate is being met. But inflation is above target and the outlook remains cloudy due to the impact from tariffs, so the inflation side of the dual mandate is not being met. Taken together, policy is rightfully "modestly" restrictive. 

Markets reacted accordingly - rates traders slashed their expectations of a rate cut in September, and are now only fully pricing in a cut by December. The dollar and yields extended their gains, and Wall Street erased its gains.

The most dramatic market reaction was in FX. The dollar index leaped 1% to a two-month high and is on track for its best week in three years. On the flip side, the euro is down more than 2% since Monday and on track for its biggest fall in three years. 

On the economy, Powell said the first estimate of Q2 GDP was broadly as policymakers had anticipated. The U.S. economy expanded at a 3.0% annualized rate in the second quarter, faster than the consensus forecast of 2.4%. On the face of it, this looks nothing but bullish.

But that was skewed by a record rebound in net trade, which followed a record negative contribution from net exports in the first quarter. Private domestic final purchases, a gauge of underlying demand, rose at its slowest pace since 2022.

In effect, headline growth is masking weaker underlying data. Most economists agree that the highest tariff rates since the 1930s will likely hurt the U.S. economy to some degree at some point. But right now, the pain appears just about manageable.   

U.S. President Donald Trump has tempered his most belligerent trade threats and begun striking deals with major partners, meaning most countries won't face the punishing tariffs announced on 'Liberation Day'. Not so Brazil. 

In fact, Brazil's trajectory has gone in the opposite direction. On April 2, Brazil faced the minimum 10% tariff rate, but if a deal is not reached by the end of this week, South America's largest economy is staring at a whopping 50% levy.

That's significantly higher than the 15% rates negotiated in both the U.S.-Japan and U.S.-European Union deals. Setting aside China, the 50% charge would match the highest levy applied to any country in the Liberation Day 'reciprocal' tariff program.

And, importantly, the impasse is rooted in politics, not economics. Brazil is one of the few major economies with which the United States runs a trade surplus. Indeed, it has done so every year since 2007, with last year's goods surplus clocking in at $6.8 billion on a total trade volume of $91.5 billion, U.S. Census Bureau figures show.

Trump has tied the 50% tariffs to judicial moves in Brazil against former president and ideological ally Jair Bolsonaro, who has been accused of plotting a coup following the election of leftist President Luiz Inacio Lula da Silva. "LEAVE BOLSONARO ALONE!" Trump wrote on social media earlier this month.

Diplomatic relations are frosty right now, and between Trump and Lula they are downright icy. The prospect of them thawing by the end of this week is negligible.

"Trade deals are a result of negotiations, but there is no dialogue if the U.S. doesn't respond to our letters. I'm worried," said one Brazilian government official.

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