Morning Note: Fed Cautious on Tariffs; US-Japan Currency Tensions; Oil Up

Fed Eyes Data as Tariffs Cloud Outlook

U.S. Federal Reserve Chair Jerome Powell said on Wednesday that the Fed would remain patient and wait for additional economic data before adjusting interest rates. However, he warned President Donald Trump's tariff policies could disrupt the economy by pushing inflation and employment further from the Fed's targets. Speaking publicly for the first time since Trump eased some harsher tariff measures, Powell described the recent market volatility as a rational response to sudden shifts in trade policy, rather than a signal of financial instability that would prompt intervention by the Fed.

Powell described the administration’s tariff strategy as a “fundamental change” with few historical comparisons, making it difficult for businesses and economists to predict its impact. He noted that the U.S. economy began the year near full employment, with inflation trending toward the Fed’s 2% target, a scenario many believed was unlikely. Despite recent financial fluctuations, Powell expressed confidence in market resilience, emphasising that bond and equity markets were functioning properly and adapting to the evolving policy environment.

Currency Tensions Loom Over U.S.-Japan Talks

U.S. President Donald Trump's push for a stronger yen against the dollar is expected to surface in ongoing trade talks with Japan in Washington. While currency adjustments could be politically motivated, analysts warn that any attempt to influence exchange rates carries significant risks for both nations. The White House placed currency policy firmly on the agenda after Trump accused Tokyo last month of deliberately weakening the yen to gain a trade advantage.

Japan’s economy minister and chief negotiator, Ryosei Akazawa, launched the discussions on Wednesday by meeting U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson, with Trump making an unexpected appearance. Although Akazawa stated that currency matters were not discussed during this session, he noted that such topics are typically handled by Finance Minister Katsunobu Kato, who will meet with Bessent during the upcoming IMF and World Bank meetings.

Oil Rises on Iran Sanctions and OPEC Cutbacks

Oil prices extended their gains on Thursday, driven by renewed supply concerns after the U.S. imposed fresh sanctions targeting Iran’s oil exports. On Wednesday, the Trump administration introduced new measures aimed at curbing Iranian crude trade, including sanctions against a China-based “teapot” refinery. These actions come as part of mounting pressure on Tehran amid ongoing negotiations over its intensifying nuclear program.

Further adding to bullish sentiment, the Organisation of the Petroleum Exporting Countries (OPEC) announced it had received updated commitments from members such as Iraq, Kazakhstan, and others to implement additional output cuts to offset previous overproduction. While Iran’s output may not be substantial, and OPEC quotas are frequently breached, these developments have still contributed to a more supportive tone in the oil market.

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