The American economy, a black belt in judo? Macroeconomic publications across the Atlantic follow one another and seem to tirelessly send the same message: it bends... but doesn't break. This maxim, echoed in the art of judo, finds its inspiration in the image of a willow sagging under the weight of snow: it bends without ever breaking, where rigidity would lead to rupture. This metaphor, also found in Jean de La Fontaine's famous fable, The Oak and the Reed, encourages us to reflect on true strength, which lies not in inflexibility, but in the ability to absorb, adapt, and regain one's balance. This wisdom, admittedly, does not always seem to resonate with President Trump's stance.
In terms of the American macroeconomy, the figures published last week continued to paint a mixed picture. Like the willow, it bends but does not break, still seeming capable of absorbing successive shocks. After demonstrating astonishing resilience in the face of a prolonged period of high interest rates, the markets' attention is now focused on the impact of the new customs duties. In this context, July's consumer prices were particularly scrutinized. On the flip side, inflation was broadly in line with expectations, and the good news is that goods prices remained contained (+0.2% over one month). Some theoretically highly exposed sectors, such as new cars and clothing, even appear relatively unaffected. The consequences of the customs duties are therefore still difficult to measure: they could prove less brutal than anticipated, but also more diffuse over time, as companies have generally built up inventories to cushion the shock. The impact on goods prices remains tangible nonetheless: on an annual basis, core goods prices are now up more than 1.1%, whereas they were still in deflationary territory last March. On the flip side, and this is where the problem lies, services inflation has started to rise again (+0.4% over the month). This is all the more problematic given that services account for nearly two-thirds of inflation. More difficult to contain because it is domestically rooted and much more persistent, this component poses a far more complex challenge for the Fed, especially since a few days later, the release of producer prices showed a sharp acceleration.
Under these conditions, the Fed finds itself more than ever caught between a rock and a hard place. With headline inflation at 2.7% and core inflation at 3.1%, the official 2% target increasingly looks like wishful thinking, especially since the current trajectory suggests continued upward pressure through the end of the year. At the same time, the labor market is sending signals of increasing easing. Positions within the FOMC appear increasingly divergent, and the most dovish members, perhaps intentionally, are playing into the hands of the Trump administration. With the market already pricing in a 25 bps cut in September with near certainty, Jerome Powell could use the Jackson Hole symposium to regain control and attempt to maintain an optionality that allows him to adjust course until the last moment.