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Today’s Points:

• The FOMC changed close to nothing.
• By Wednesday’s close, the same was true for US stock and bond markets. 
• One complicating factor — the return of rising food prices.
• At the time of writing, the US has not attacked Iran.
• AND: The mogul who’d rather be compared to Genghis Khan than Bill Gates.

One Less Thing to Worry About

The Federal Reserve is always powerful. For decades, and certainly since the Global Financial Crisis, it has probably been the single most important driver of the world economy and markets. It hasn’t lost that role, but for the coming few months it is out of the driving seat. What happens next at the Fed is contingent on what happens on a number of other fronts. Thus, as Points of Return suggested last week, in deference to the Beach Boys, we need to wait all summer long for clarity on where monetary policy goes from here. 

The Fed left rates on hold, as universally expected and justified in the opening sentences of its statement:

Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.

As to where the Fed thinks it’s going next, the latest “dot plot,” in which each member of the committee gives an estimate of future fed funds, created the most interest. The median member still expects two cuts during the last four meetings of this year. That was hailed as good news initially by markets, but it’s difficult to make much of it.

This is how the terminal breaks down the shift in the dot plot; gray dots are from the March meeting and the yellow dots are the most up to date. There are some subtle changes in there, but the obvious first reaction to this chart is accurate; it really hasn’t changed that much despite all the drama of the last three months:

As might be expected, forecasts diverge more as we look further into the future. The rates market, as gauged by Bloomberg’s World Interest Rate Probabilities function, has consistently predicted that fed funds will be somewhere between 3.0% and 3.25% by the end of next year. That implies a couple of more cuts by then than the Fed currently predicts, which in turn suggests that traders are more worried about growth than the central bankers are:

When it came to economic projections, the dots showed the central bankers growing slightly more negative about growth prospects for next year, while also expecting slightly higher inflation — so stagflationary at the margin, and neutral when it comes to the direction of the next rate move.

Somehow, all of this was taken as dovish enough to prompt a lot of people to buy two-year bonds, which are sensitive to the fed funds rate. But the press conference by Chair Jerome Powell, which started 30 minutes later, reversed almost all of it:

The critical passage from the Powell remarks that moved bond yields back upward was this one:

Ultimately the cost of the tariff has to be paid, and some of it will fall on the end consumer. We know that’s coming, and we just want to see a little bit of that before we make judgments prematurely.

Until the Fed is really confident that tariffs haven’t triggered a significant bump in inflation, in other words, it’s going to have to stay on hold. The risk of a commodity price spike created by the Middle East conflict adds to the arguments to wait and see. To quote Standard Chartered Plc’s Steven Englander, we should “take the summer off.” Englander also suggests that Powell is implicitly arguing for fewer than two cuts this year:

Given the absence of references to softer activity, and how frequently he referred to price increases from tariffs, we think it is possible that Powell was among those who saw zero or one cut. 

The Fed chair is only very rarely outvoted, so it’s significant if he is now one of the hawks.

All of this, however, goes beyond the broad outline that nothing the FOMC announced made any change of any significance to the likely course of rates ahead. The committee obviously didn’t want to move the needle, and it succeeded. Once there is clarity on the Middle East and on tariffs, then it can be more active. For now, it’s overseeing low unemployment, declining inflation and booming asset markets, despite everything. 

For both stocks and bonds, this was an unusually quiet FOMC day, with the S&P 500 closing down 0.03%, and the 10-year bond yield unchanged. Oh for such calmness and predictability in the Middle East. 

An Eye on Food Prices

The biggest takeaway from the most recent US inflation print was that tariffs are still not showing up in any significant way. If it carries on like this for a few more months, rate cuts are likely. But there’s another risk to those likely two cuts by year-end, and it’s naggingly beyond the Fed’s control — the surge in food prices. Last month, food inflation climbed to 0.3% month-on-month, its fastest pace since 2021. The monthly advance surpassed the average pace of inflation growth in the last five months:

While tariff pressures may have something to do with this price growth, the escalation in the Middle East poses an additional upside risk that hasn’t yet shown itself in food prices. The concern is that closing the Strait of Hormuz, a possible desperation tactic by Iran to shut off the flow of oil, would also affect agricultural commodities. The passage is a major transit point for fertilizer producers in the Gulf region. Iran ranks among the largest global exporters of urea anhydrous ammonia. Other fertilizer producers like Qatar,  Saudi Arabia and Oman also rely on the passage. That helps to explain a recent rise in the futures market:

Key staples like corn, wheat, and soybeans rose significantly. Although they aren’t quite at the levels they reached in 2022 after Russia’s invasion of Ukraine, which directly affected crop production, there’s no telling how high they could rise if the Middle East conflict spreads further. Throw in the likely eventual impact of tariffs, and consumers would be facing the prospect of paying higher prices for food.

It’s hard for the Fed to ignore this, because food prices have grown very political. The escalating price of groceries, particularly eggs, was arguably the single most important driver of the Democrats’ defeat in the presidential election. And the last spike in agricultural prices, coming just as inflation was taking off after the pandemic, contributed to the food price surge of 2022:

Wednesday’s 4.4% price surge of wheat was the biggest since July 2023. Bloomberg News reports that trend-following traders have significantly scaled back a net bearish bet in wheat and could soon flip to a net bullish stake, according to Bridgeton Research Group. The latest Commodity Futures Trading Commission data showed the short in wheat at the lowest in seven weeks. 

The fundamentals aren’t that worrying, away from the current very visible risks. Bloomberg Intelligence’s senior commodity strategist, Mike McGlone, argues that good weather is likely to boost supply, which will eventually curtail any potential sustained price surge. Corn, soybean, and wheat prices are more likely to decline than rise into year-end unless there's a Corn Belt drought. Prices are likely to return to 2019 levels:

Our bias is with the low probability of a Corn Belt supply shock versus the potential for another good production year, backed by the trend of superabundance in oil and liquid fuels continuing to pressure prices. Absent a drought, legislation to buttress biofuel demand or exports may help buoy the grains.

Although Powell plays down the conflict’s risks to US energy prices, it is challenging to extend the same assurance globally. Until tensions flared up, Bloomberg Economics’ Ziad Daoud argued that the global disinflation story was looking solid even in the face of tariff uncertainty:

Tariffs have played a role: dampening demand, weakening the dollar, and lowering oil prices. But the Iran-Israel war threatens to reverse that. Crude is rising again. And if the conflict escalates further, so will consumer prices.

While the promising May inflation data, coupled with the latest Fed dot plot, suggests that US rate cuts are on the horizon, the path is far from smooth. The significant surge in food prices adds a layer of uncertainty, even if it’s short-lived. In the near term, the combination of geopolitical instability, looming tariff effects, and volatile commodity markets poses a clear and imminent danger to consumer food prices. Consequently, while disinflationary trends might persist in other sectors, food inflation presents a stubborn hurdle that could complicate the Fed’s timing. 

—Richard Abbey

Survival Tips

A reading tip. My long-time boss Lionel Barber has written a biography of SoftBank founder Masayoshi Son: Gambling Man: The Wild Ride of Japan’s Masayoshi Son. I haven’t had the chance to sit down and read it amid the excitement of Trump 2.0, but the review in the London Review of Books by Laleh Khalili is a great 10-minute read in its own right that I thoroughly recommend. It doesn’t just tell Son’s story, but gets to the heart of the contemporary AI excitement.

One killer quote caught my eye. Son actually told Barber: “The right comparison for me is Napoleon or Genghis Khan or Emperor Qin. I am not a CEO. I am building an empire.” He refused to be compared with Bill Gates or Mark Zuckerberg who “only” founded Microsoft and Facebook. Breathtaking. A happy Juneteenth to American readers; Points of Return will be back next week. 

More From Bloomberg Opinion

• Allison Schrager: Private Equity Has Peaked, and It’s About Time
• Hal Brands: Israel’s War With Iran Isn't One Conflict. It’s Three.
• Andreas Kluth: The G-7 Was a Great Idea — Until it Became One Against Six

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