Fed chief blames Trump tariffs for freeze in rate cuts

The Dow is currently up 1.1pc, while the S&P is down 0.1pc and the Nasdaq is down 0.8pc on the day.

Senate Republicans hauled Mr Trump’s big tax breaks and spending cuts bill to pass on the narrowest of votes, pushing past opposition from Democrats and their own Republican ranks after a turbulent overnight session.

JD Vance, the vice-president, broke a 50-50 tie to push it over the top.

The package now goes back to the House, where Mike Johnson, the speaker, had warned senators not to deviate too far from what his chamber had already approved. But the Senate did make changes, particularly to Medicaid, risking more problems as they race to finish by Trump’s Fourth of July deadline.

There is no prospect of a major challenge to the dollar’s status as the world’s reserve currency of choice any time soon, central bankers gathered in Portugal have said.

Donald Trump’s unpredictable economic, trade and security policies have spurred questions over whether the US currency, which accounts for 58pc of the world’s reserves, can remain at the centre of the global monetary system.

European Central Bank president Christine Lagarde, who has argued the euro could over time become an alternative to the dollar if Europe’s currency zone enacted necessary reforms, said 2025 could in future be viewed as “pivotal” in this respect.

“For a major change to occur it will take a lot of time and a lot of effort,” she said.

She noted that “investors are looking at options” in a climate characterised by uncertainty and unpredictability and that there was evidence that the euro was benefiting from that.

“It’s not going to happen just like that overnight. It never did historically,” she said. “But there is clearly something that has been broken. Whether it is fixable, or whether it is going to continue to be broken – I think the jury’s out.”

Bank of Japan Governor Kazuo Ueda said: “It’s to a certain extent up to what areas like Europe or China will do in terms of improving the efficiency or convenience of their currencies.”

Bank of England Governor Andrew Bailey said any change to the dollar’s status was a long way off.

“I don’t see … a sort of a major shift at the moment,” he said, arguing that any reserve currency had to offer a supply of safe assets into the market that can be used for purposes of collateral and security.

Global shares edged lower as investors digested a flurry of US economic data and comments from Fed chairman Jerome Powell.

Speaking at a central banking conference in Sintra, Portugal, Mr Powell said he could not say if July was too early for a rate cut, but it “is going to depend on the data, and we are going meeting by meeting”.

Market expectations for a July cut inched up to 21.2pc from 18.6pc yesterday, according to CME’s FedWatch Tool.

On Wall Street, the Dow advanced but the S&P 500 and Nasdaq retreated from record levels, weighed down by a drop of more than 5pc in Tesla. The carmaker fell after Donald Trump threatened to cut off the billions of dollars in subsidies that Elon Musk’s companies receive.

The Dow Jones Industrial Average rose 0.9pc, the S&P 500 fell 0.3pc, and the Nasdaq fell 1pc.

MSCI’s gauge of stocks across the globe fell 0.3pc. However, the FTSE 100 rose 0.3pc and the FTSE 250 rose 0.5pc.

On the economic front, US data showed manufacturing remained in contraction in June, according to the Institute for Supply Management (ISM).

In the first reading of the week on the labour market, the Job Openings and Labour Turnover Survey showed openings were up 374,000 to 7.8m by the last day of May, but a decline in hiring indicated the market may have slowed.

The US is on an unsustainable debt path, the chair of the Federal Reserve has warned, as senators debate Donald Trump’s tax cutting plans.

Initially saying he would not comment on fiscal policy, Jerome Powell said the “US federal fiscal path is not a sustainable one” as Congress edged closer to approving plans that could add $3.3 trillion to the American government deficit over the next 10 years.

He told the ECB annual forum in Sintra: “That is the one thing that I have said and my predecessors have also said.

“The US federal fiscal path is not a sustainable one. The level of the debt is sustainable but the path is not and we need to address that sooner or later.

“Sooner is better than later.”

President Trump’s One Big Beautiful Bill is being debated by the Senate. If approved it would deliver tax cuts for Americans while pushing higher the $37 trillion US national debt.

Asked if attacks from Donald Trump make his job harder, Fed chief Jerome Powell said: “I’m very focused on just doing my job. The things that matter are using our tools to achieve the goals that Congress has given us.”

His comments were met with applause.

Shares in Elon Musk’s electric vehicle (EV) maker plunged by more than 6pc as markets opened across the Atlantic on Tuesday.

It comes after Donald Trump threatened to target the company – and Mr Musk’s other businesses – with spending cuts amid a war of words that has been brewing between them.

Jerome Powell, chair of the US Federal Reserve, said the US economy had not yet seen the true impact of Donald Trump’s tariffs.

He told the ECB Forum in Sintra: “If you ignore the tariffs for a second, inflation is behaving pretty much exactly as we have expected and hoped that it would. We haven’t seen the effects much yet from tariffs and we didn’t expect to by now.”

Asked if the Fed would have brought down US interest rates if the tariffs had not come into effect, he said: “We went on hold when we saw the size of the tariffs, and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs.

“We didn’t overreact. In fact, we didn’t react at all.We’re simply taking some time. As long as the US economy was in solid shape, we think the prudent thing to do is to wait and learn more and see what those effects might be.”

It comes as Mr Powell is coming under fierce pressure from Mr Trump to lower interest rates to offset the impact of his trade war on American consumers

He said the Fed would be looking carefully at inflation and the US labour market when deciding whether to bring down rates, especially for any “unexpected weakness”. He added: “We see a gradual cooling, but we don’t really see that yet.”

The Bank of England governor is due to speak alongside his counterpart at the European Central Bank forum, Christine Lagarde, and chair of the US Federal Reserve, Jerome Powell, later this afternoon at the ECB Forum in Sintra, Portugal.

Elon Musk has expressed regret over a conference performance in February at which he waved a chainsaw around with Argentinian president Javier Milei.

The Tesla billionaire said in a post on X (formerly Twitter): “Milei gave me the chainsaw backstage and I ran with it, but, in retrospect, it lacked empathy.”

It comes as Mr Musk has locked horns with US president Donald Trump over recent weeks. He has criticised Mr Trump’s spending plan on the basis that it will add billions to the US’s national debts, while Mr Trump has accused Mr Musk of being angry about losing subsidies that benefit his business empire.

Mr Trump said on Tuesday he would “take a look” at deporting Mr Musk when asked about the feud at the White House.

US president Donald Trump said on Tuesday he is open to extending a July 4 deadline placed on US Senate Republicans to get behind his so-called ‘Big, Beautiful Bill’.

Senators have been locked in days of debate as they battle to pass the controversial bill, which contains sweeping tax cuts but has fuelled concerns over US debt levels.

Speaking to reporters at the White House, Mr Trump said it would be wise for Republicans to get on board

Central banks have no God-given right to independence, writes Ambrose Evan-Pritchard.

Nothing in the US constitution authorises the US Federal Reserve to act as a shadow government, and nor should it have such powers under any theory of accountable democracy.

One can admire the gentlemanly altruism of Fed chairman Jay Powell, and one can deplore the motives and methods of Donald Trump, while also conceding that Trump is accidentally right on the perils of overmighty technocrats. The Fed has slipped its leash.

It is not alone in that. Central bankers have been calling the shots across the advanced democracies over the last 30 years, elevating this priesthood to the status of Nietzschean rock stars.

Sir Paul Tucker argues in his exposé, Unelected Power: The Quest For Legitimacy in Central Banking, that they have become the “third great pillar of unelected power”, akin to the judiciary but without the constraints.

The Bank of England veteran says the fraternity has strayed a very long way into “quasi-fiscal” intervention, picking winners and losers in what amounts to a revolution in the system of government.

There is a case for zero rates and quantitative easing in a crisis, but these policies were pursued for too long and have led to a vast transfer of wealth from wage workers to the owners of capital. The central banks unwittingly became agents of extreme inequality.

Trump has purged the top echelons of the US military, the CIA, the NSA, the FBI, the justice department and every agency that stands in his way. It would be out of character if he spared the Fed.

Britain must reform its “outdated” planning system and build more homes if it wants to get more people buying property, campaigners have warned.

Sam Richards, chief executive of Britain Remade said: “The increase in average house prices may have slowed, but the eye-watering amount that people are having to pay to buy a house is just extraordinary.

“In London it takes a couple, earning a normal income, 13 years on average to save a deposit, up from just three years in the 1990s.

“This is not an accident; this is the consequence of failing to build in order to meet demand for decades.

“The only way to fix this is by reforming our outdated planning system. The planning bill, which is working its way through Parliament, will go some way in fixing the system so we can get building the homes we desperately need as quickly as possible.

“But the Government must go further.

“Not only will this allow young people to once again get on the housing ladder, it’s critical for boosting growth. Until we build the homes we need, millions of young people across the country will be denied the dream of home ownership.”

US stock indexes dipped in premarket trading as investors monitored US trade talks and a voting marathon in the Senate over President Donald Trump’s tax and spending bill.

The S&P 500 and the Nasdaq Composite reached record closing highs on Monday, capping their best quarter in over a year as hopes for more trade deals and possible rate cuts supported sentiment.

US senators were still voting on Tuesday on a potentially long list of amendments to Mr Trump’s bill that is expected to bring a $3.3 trillion hit to the nation’s debt pile, fuelling uncertainty among investors.

Meanwhile, the President expressed frustration with US-Japan trade negotiations and treasury secretary Scott Bessent warned that countries could be notified of sharply higher tariffs as a July 9 deadline approaches despite good-faith negotiations.

Tesla’s shares dropped 4.7pc premarket after a fresh spat between chief executive Elon Musk and Mr Trump over the tax bill, with the president urging the government efficiency department to review the subsidies that electric vehicle makers receive.

Tesla also reported a sales drop for a sixth straight month in Sweden and Denmark in June.

In premarket trading, the Dow Jones Industrial Average fell 0.1pc, the S&P 500 dropped 0.2pc and the Nasdaq 100 was down 0.3pc.

The pound has surged to its highest point against the dollar for four years.

Sterling topped $1.38 on Tuesday, its strongest level since October 2021.

It comes as worries over Donald Trump’s economic policies and spending plans have knocked confidence in the greenback.

The news will be welcomed by British holidaymakers planning for a summer trip across the Atlantic over the coming weeks.

However, the pound has not fared as well against the euro, against which it has stagnated for the last fortnight, falling from €1.20 at the end of May to €1.17 at present.

Tony Redondo, of Cosmos Currency Exchange, said the euro had benefited from capital inflows in the wake of President Trump’s trade wars.

Net zero is set to add £104 to household energy bills by the end of the decade after the regulator signed off on a £24bn investment into Britain’s power network.

Ofgem on Tuesday provisionally approved plans to invest £15bn into the country’s gas transmission and distribution networks, as well as just under £9bn into electricity networks.

The latter investment is the first stage of a planned £80bn upgrade to the country’s electricity networks over the next five years to ensure the grid is ready for net zero.

Ofgem said the cash would support the biggest expansion of Britain’s electricity grid since the 1960s. A total of 80 projects will be funded, increasing the numbers of power lines, cables and other technologies to be deployed as the country shifts towards cleaner power.

The investments will be funded through levies on household energy bills and Ofgem said these initiatives would add £104 to network charges by 2031.

Of that increase, £30 is linked to the depreciation of the gas network and £74 to upgrading the electricity grid.

Inflation in the eurozone ticked up last month but remained in line with the European Central Bank’s 2pc target.

The rise from 1.9pc in May to 2pc in June was in line with what analysts had expected.

Earlier, European Central Bank chief economist Philip Lane said he believed the cycle of interest rate rises and cuts to tame inflation was now “done”.

Rachel Reeves has been warned that a fresh tax raid to fund benefit U-turns risks “undermining the UK economy”, as business confidence crumbles.

The Institute of Directors’ (IoD) closely watched survey of bosses confidence tumbled to -53 in June from -35 in May.

The lobby group blamed the impact of the Chancellor’s National Insurance tax raid, which took effect in April, and gloom from Donald Trump’s trade war.

Property developers struggled on the London stock market after the sharpest decline in house prices in more than two years.

Barratt Redrow dropped as much as 2pc to be the worst performer on the FTSE 100, with Taylor Wimpey down as much as 1.5pc.

Housebuilding stocks across the FTSE 350 were down 1.2pc.

Rob Peters of broker Simple Fast Mortgage said he feared “this slowdown could be the canary in the coal mine”.

He said: “Rising rates, stubborn inflation, and economic uncertainty are squeezing buyers dry. If growth keeps falling at this pace, sellers will be forced to slash prices just to get deals through which risks dragging the entire market into a stagnation spiral.”

Babek Ismayil of estate agent OneDome said the slowdown “likely reflects the lull in activity and demand” after the end of the stamp duty holiday.

He said: “A cut at the next Bank of England interest rate meeting in August would potentially ignite the market in the late summer and into the autumn but that is not guaranteed given stubborn inflation.

“The uncertainty around the pace and timing of further cuts is keeping both buyers and lenders cautious. A key issue is that buyers aren’t just battling financial pressures but are having to navigate a homebuying process that’s slow, fragmented, and frighteningly Dickensian.”

Britain’s factory bosses warned that tariff uncertainty impacted both overseas demand and client confidence as they cut jobs for an eighth month in a row.

The closely watched S&P Global UK Manufacturing PMI showed the downturn in the sector slowed in June, although output, new orders and staff numbers all contracted.

Rob Dobson, director at S&P Global Market Intelligence, said: “Any hoped for stabilisation remains fragile and subject to potential headwinds that could severely impact demand, supply chain reliability and future growth prospects, as manufacturers continue to caution their optimism with concerns about heightened geopolitical tensions, weak global markets, tariff uncertainties and fears over the direction of future government policy.”

Andrew Bailey said rising uncertainty in the global economy had “definitely” hurt economic growth amid Donald Trump’s tariff onslaught.

“That increase in uncertainty and predictability is definitely coming through in terms of activity and growth,” the Governor of the Bank of England told CNBC from the European Central Bank summit in Sintra, Portugal.

“When I go around the country talking to businesses, which I do a lot, what they tell me is that they are putting off investment decisions.”

Mr Bailey said today that a key question for the Bank was how much the weakening of the labour market and the economy would help to reduce inflation pressure.

The yield on two-year UK gilts – a benchmark for the cost of short-term government borrowing – fell to around 3.79pc after the Governor said Britain’s jobs market is weakening.

The European Central Bank’s series of interest rate rises and cuts to bring inflation back under control is “done”, its chief economist has said.

Philip Lane said the bank must remain data dependent but would not respond to any isolated “blip” in inflation going forward.

“We do think the last cycle is done,” he told CNBC.

“Bringing inflation down from the peak of 10pc, back to 2pc, that element is over, but on a forward-looking basis we do need to stand ready to make sure that any deviation we see does not become embedded, does not change the medium-term picture.”

Eurozone inflation rate came in at 1.9pc in May, below the central bank’s 2pc target.

However, he warned there were growing risks to inflation and growth in the single currency bloc.

Regarding interest rates, he added: “If we have to move more it probably will be to the downside, a further cut. I’m not pleading for one, but I think if there is any discussion it’s more in that direction.”

Andrew Bailey said he expects interest rates to fall gradually as the UK jobs market weakens.

The Governor of the Bank of England said at the European Central Bank’s annual forum that he expects the labour market to loosen, with the key question being how it will feed through to inflation.

Mr Bailey told CNBC: “I do see some underlying weakening, particularly in the labour market – and the labour market is softening.”

Asked what would happen to interest rates at the Bank of England’s next meeting in August, he said: “We’ll see.”

Mr Bailey will later appear on a panel at the ECB retreat in Sintra, Portugal, alongside ECB president Christine Lagarde, Federal Reserve chair Jerome Powell, Bank of Japan governor Kazuo Ueda and Chang Yong Rhee, the Governor of the Bank of Korea.

The FTSE 100 opened higher as traders bet that the global economy will be able to cope with Donald Trump’s tariff turmoil.

The UK’s flagship stock market rose 0.3pc to 8,784.56 while the mid-cap FTSE 250 gained 0.1pc to 21,657.13.

The pace of house price growth will “remain weak for the coming months” before picking up again next year, economists have predicted.

Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said the unexpected 0.8pc decline in prices in June “could represent an unwind of the rise in prices in May, rather than a signal as to the trajectory of near-term house price inflation”.

But he warned that “the big picture for now is that trend-growth in the private-sector house price indices remains weak, so it will take some months for sustained positive momentum to be built back up following the slowdown in activity since January”.

He said: “Looking ahead, we think that steady economic fundamentals will drive the recovery in house prices over the coming year.

“We expect GDP to grow by 1.3pc year-over-year in 2025, up from 0.7pc in the immediate aftermath of ‘liberation day’, which means the labour market will remain relatively robust and buyer demand will steadily improve as the market normalises following the April stamp-duty hike.

“Falling borrowing costs will also improve mortgage accessibility if the MPC continues to cut rates twice more this year, as the market currently expects, while less restrictive affordability calculations from lenders — as recommended by the FCA — could also help unlock demand and boost house prices.

“Still, that recovery will take time to materialise in the official index, as the ONS’ measure of house prices lags the private-sector indices. So we expect official house price inflation to remain weak for the coming months before picking up again later in the year.”

Interest rate cuts will help house prices regain momentum next year, economists have said.

Nationwide said the value of the average home fell for the third time in four months in June, while the annual rate of growth dropped to an 11-month low of 2.1pc.

However, separate data from the Bank of England on Monday showed mortgage approvals increased by 2,400 to 63,000 in May.

Paul Dales, chief UK economist at Capital Economics, said: “The first rise in the number of mortgage approvals in five months in May points to the annual growth rate of house prices rising back to around 3.5pc.

“That might not happen in time to meet our existing forecast that prices will rise by 3.5pc in the year to the fourth quarter of 2025.

“But our new forecast that Bank Rate will fall from 4.25pc now to 3pc next year (our previous forecast was for a fall to 3.5pc) suggests that housing activity and prices will regain more momentum next year.”

Thanks for joining me. House prices fell unexpectedly last month after Rachel Reeves’s stamp duty raid hit the property market.

The average home was worth £271,619 in June, down by 0.8pc from £273,427 in May, according to the Nationwide house price index.

It was the sharpest decline since February 2023 and was well below analyst estimates for a 0.1pc increase in prices.

It comes after the Chancellor refused to extend the post-pandemic stamp duty holiday, which came to an end in April.

It meant the threshold at which buyers start paying the levy was reduced to £125,000 from £250,000.

For first-time buyers in England, the threshold for not paying stamp duty was also reduced from £425,000 to £300,000.

Nationwide’s chief economist Robert Gardner said: “The softening in price growth may reflect weaker demand following the increase in stamp duty at the start of April.”

Compared to the same month a year earlier, house prices grew at a slower pace of 2.1pc, down from 3.5pc in the year to May.

Paul Dales, chief UK economist at Capital Economics, said: “The housing market is still struggling to recover from the combination of the stamp duty induced lull and the subdued economic backdrop.”

Here is what you need to know.

1. Trump triggers dollar’s worst start to year since 1973 | US president’s tariff onslaught sent US assets plunging amid worries over the future of the world’s largest economy

2. ‘No intention of coming back’: The expats choosing proximity to Iran over a life in Britain | Conflict in the Middle East hangs over the calm in tax-free Dubai – but for many life goes on

3. Families’ disposable income slumps in blow to Labour | Prime Minister’s pledge to raise living standards on shaky ground as inflation and tax rises hit households

4. Ben Marlow: British manufacturing could disappear for good under Labour | A lethal cocktail of neglect, complacency and short-termism is devastating UK industry

5. Adam Smith: Starmer has shredded Reeves’s credibility – how long can she last? | Changing her fiscal rules would be a resigning matter for the Chancellor

Asian shares are mostly higher after US stocks added to their records with the close of a second straight winning month.

Japan’s Nikkei 225 fell 1.2pc to 40,003.24 despite positive results of the central bank’s quarterly Tankan survey of large manufacturers, which showed an better than expected improvement in business sentiment.

The Shanghai Composite index added 0.2pc to 3,451.69 after China’s official manufacturing purchasing managers index, or PMI, rose to a three-month high of 49.7 in June while the PMI for services and other non-manufacturing businesses also rose to a three-month high of 50.5.

Hong Kong’s stock market was closed on Tuesday.

South Korea’s Kospi Composite Index surged 1.5pc to 3,117.17 after the government reported that exports bounced back in June, helped by strong demand for semiconductors, ships and health products.

Australia’s S&P/ASX 200 edged up 0.1pc to 8,550.80. The PSEi in Manila, Philippines, rose 0.2pc.

On Wall Street, US stocks rose modestly with the S&P 500 and Nasdaq closing at record levels for a second session in a row, led by the tech sector.

The Dow Jones Industrial Average rose 0.6pc, to 44,094.77, the S&P 500 rose 0.5pc, to 6,204.95, and the Nasdaq Composite rose 0.5pc, to 20,369.73.

In the bond market, the yield on 10-year US Treasury notes fell to 4.228pc from 4.290pc late on Sunday.