Powell Emphasizes that Tariff Impacts Remain Uncertain

Treasury yields decline again. Treasurys rallied in a relatively quiet session today, pushing yields to their lowest levels since early May. The 2-year yield closed at 3.78% after a 4 bp decline while the 10-year was nearly flat at 4.29%, and both are ~30 bps lower than their highest closing levels since May. Meanwhile, the Nasdaq 100 and Nvidia hit all-time highs, with the former at 22,238 while the latter climbed over $154 per share. Markets are now looking ahead to tomorrow’s GDP and PCE data for additional clues about the Fed’s path forward.

Chair Powell highlights tariff uncertainty in Congressional testimonies. During his testimony to the Senate Banking Committee today, Chair Powell highlighted that the impact of trade policies on inflation remains unclear. He stated, “The question is, who’s going to pay for the tariffs…how much of it does show up in inflation…and honestly, it’s very hard to predict that in advance.” However, he did note that the Fed expects tariffs to drive higher inflation starting this summer, and yesterday he told the House that the Fed needs time to observe the magnitude of tariff impacts before becoming comfortable with rate cuts. He said, “We should start to see this over the summer, in the June number and the July number…If we don’t we are perfectly open to the idea that the pass-through (to consumers) will be less than we think, and if we do that will matter for policy…”

Fed proposes bank capital rule changes. New Vice Chair for Supervision Michelle Bowman has emphasized in recent weeks that changes to the enhanced supplementary leverage ratio (eSLR), applicable to the largest US banks, will improve Treasury market liquidity. Today, the Fed board announced proposed changes to the eSLR, including reduced capital requirements for holding companies and bank subsidiaries to 3.5%-4.5% from the current 5% and 6%, respectively. Bowman stated, “The proposal will help to build resilience in U.S. Treasury markets, reducing the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event.” Critics say that the reduced capital requirements will inject additional risk into the system; former Vice Chair for Supervision Barr argued, “these changes would significantly increase the risk that a G-SIB bank would fail, orderly resolution would not be possible, and the Deposit Insurance Fund would incur higher losses.”