US central bank chairman stands firm

The Fed, as expected, left interest rates unchanged. Nevertheless, it was a striking decision. Two members of the policy committee voted against the decision. These were, moreover, two members of the Federal Reserve Board in Washington. Occasionally, decisions are not unanimous, but in those cases, it is usually one of the presidents of the regional Federal Reserve banks who votes against a majority decision. The last time two members of the Washington board voted against the decision was in 1993. So, very unusual.

Board members Michelle Bowman and Chris Waller wanted to lower the interest rate, exactly as Trump wants. Of course, they have substantive reasons for their vote against, but it's also possible they aspire to succeed Powell as chairman next year. I found Bowman's vote against the Fed particularly noteworthy, as she also voted against it last September. That's when the Fed cut the rate by 0,5%, and Bowman would have preferred a 0,25% cut. So, back then, she was too quick with rate cuts, now too slow. Things can change.

Powell explained the decision well. The labor market is tight, and you could say the Fed's goal of maximum employment has more or less been achieved. However, inflation is above target, and the effects of Trump's tariffs on inflation are yet to materialize. A "moderately restrictive" interest rate stance is therefore appropriate, according to Powell, and that is precisely how he characterizes the current interest rate level. It remains to be seen whether the situation will have changed significantly by September.

When asked about the effects of the import tariffs on inflation, Powell said it was too early to make a definitive assessment. These tariffs are a tax, and that burden must be borne somewhere. This could be within the production and distribution chain through margin reductions, or by consumers in the form of inflation. Powell said that foreign producers haven't yet lowered their "bare prices." Therefore, they are not currently bearing part of the burden. According to Powell, the largest part is currently being borne by domestic parties in the chain, and a small portion is being borne by consumers. Therefore, the effect on inflation has been limited so far. However, there are two uncertainties. First, it's unclear whether the distribution of the tariff burden will remain as it is now. And if consumers do bear a larger share and inflation rises, the question is whether this is a one-off or leads to a more persistent inflationary process.

The US economy grew by 3,0% in the second quarter compared to the previous quarter. This is an annualized figure. Expressed as we calculate it, growth was 0,7%, following a 0,5% annualized contraction (approximately 0,1% in our calculation) in the first quarter. The figures for both quarters were severely distorted by anticipation of Trump's tariffs. To anticipate them, foreign exporters and US importers brought as much goods as possible to the US in the first quarter. As a result, the trade deficit widened sharply in those months. The higher imports constitute a negative in the GDP calculation, meaning the economy officially shrank slightly in the first quarter. In the second quarter, the opposite is true. Taking both quarters together, growth was approximately 1,2% annualized. This clearly represents a slowdown compared to last year's growth rate, which was approximately 2,5%. If that slowdown also affects the labor market after some time, the Fed will undoubtedly lower interest rates after all.

Dutch GDP growth is slowing
Dutch economic growth has also weakened in recent quarters. In the second quarter, growth was only 0,1%. Private consumption fell slightly, and foreign trade contributed negatively to growth. The fact that growth remained positive was due to business investment and government consumption. In its press release, Statistics Netherlands (CBS) mentions investments in ships and aircraft. These are rather lumpy and therefore volatile. This could easily change in the following quarter. I wasn't particularly enthusiastic about those figures. The CPB's recently published cMEV forecasts 1,7% growth for the entire year. That's not unattainable, but growth would have to accelerate significantly in the second half of the year. It seems highly likely that the CPB's 1,7% figure will prove to be overly optimistic.

Nevi index rose further
Industrial purchasing managers became more optimistic again in July. The Nevi index reached 51,9, compared to 51,2 in June. Businesses are very satisfied with their orders, especially those from abroad. According to the accompanying commentary by Albert-Jan Swart of ABN AMRO, the improvement in sentiment is likely primarily due to the chip sector. Therefore, it's not surprising that the Dutch purchasing managers' index is developing more positively than those in neighboring countries. We have a considerably larger chip industry than our neighbors. Hopefully, the positive trend will continue in the coming period and Trump's tariffs won't have too much of an impact. However, there is considerable uncertainty. The EU and the US have reached an agreement, but there is considerable uncertainty about it. A significant number of pharmaceutical products are exported to the US from the EU—and certainly from the Netherlands as well. It is unclear whether the Americans will impose the overall 15% tariff on these products or a higher tariff. Trump has repeatedly made strong protectionist statements about the pharmaceutical sector.

Inflation in our country was 2,9% in July, slightly lower than the 3,1% in June. This decrease is mainly due to the sharp increase in tobacco excise duty last year, which also led to price increases in tobacco shops in July 2024. This year, the tobacco excise duty has not been increased. A second factor that slightly reduced inflation is that rent increases were lower this year than last year. We will only learn how much lower when Statistics Netherlands (CBS) publishes all the details on August 12th. I fear that the downward trend in our year-on-year inflation rate has ended. Last year, the general price level fell marginally in the last five months of the year. To reduce inflation, prices will have to fall even more sharply in the coming months than last year. Not impossible, but equally unlikely.

Closing
The Fed stood firm and didn't cut rates, even though two members of the Fed had actually wanted to. I think the chance of a rate cut in September is smaller than I initially thought, but ultimately, one or two rate cuts before the end of the year still seem likely.

The US economy grew strongly in the second quarter, but that's a flattering figure. If you consider the first two quarters combined, there's a clear slowdown compared to last year.

The Dutch economy actually grew only marginally in the second quarter. However, industrial purchasing managers became more optimistic again in July, and inflation fell slightly further in July.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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