Fed Chair Jerome Powell prepares to deliver remarks to the the Federal Reserve’s Division of Research and Statistics Centennial Conference on November 08, 2023, in Washington, D.C. Photographer: Chip Somodevilla/Getty Images.
Federal Reserve officials are prepared to hold their policy rate steady to minimize the risk that President Donald Trump’s tariffs trigger a persistent rise in inflation, even if the labor market softens further. In public comments and interviews, a number of officials have sent a clear signal they are ruling out interest rate cuts that would act as an insurance policy against any tariff-induced economic slowdown. Policymakers are instead doubling down on their commitment to keep inflation—and Americans’ expectations for price growth—in check, a posture that will likely keep them on hold absent a significant rise in unemployment.
“Given the paramount importance of keeping long-run inflation expectations anchored and the likely boost to near-term inflation from tariffs, the bar for cutting rates, even in the face of a weakening economy and potentially increased unemployment, is higher,” Minneapolis Fed President Neel Kashkari wrote in an essay released yesterday morning. “The hurdle to change the federal funds rate one way or the other has increased due to tariffs.”
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Chair Jerome Powell said last Friday that the central bank doesn’t need to be in a hurry to make any policy moves as they assess the impact of Trump’s fast-changing trade policies. With financial markets in turmoil since the April 2 unveiling of new import levies, yesterday Trump walked back plans to impose so-called “reciprocal tariffs” above 10 percent on a number of U.S. trading partners.
In an interview with Bloomberg News yesterday afternoon, Federal Reserve Bank of Cleveland President Beth Hammack said she, too, is committed to being patient. “It’s a really active choice on our part that we really need to see where things are going to go,” Hammack said. “I would much rather wait and move in the right direction than move quickly in the wrong direction.”
Speaking this morning, Dallas Fed President Lorie Logan and Kansas City Fed chief Jeff Schmid each said they were focused on containing inflation in the wake of tariffs. “There is a growing possibility that in setting policy, the Fed will have to balance inflation risks against growth and employment concerns,” Schmid said. “When contemplating this balance, I intend to keep my eye squarely focused on the outlook for inflation.”
St. Louis Fed President Alberto Musalem and Fed Governor Adriana Kugler have also stressed the need to address inflation. Officials have said they’ll continue to monitor unemployment, but at the moment they see the labor market as on solid ground.
The Latest Tariff Shift
Under Trump’s latest plan, most countries will face a 10 percent baseline tariff, giving them room to negotiate a permanent deal. U.S. stocks rallied sharply on the news yesterday. But by maintaining high barriers on Chinese goods—which the president raised to 125 percent—Trump assured that the overall weight of tariffs on imports would be little changed. Bloomberg Economics estimates that lifting the duties on China to 125 percent and reducing all others to 10 percent will lower the average U.S. tariff rate from 27 percent to 24 percent.
What Bloomberg economists say...“If we are understanding correctly, the latest announcement shifts tariff rates between countries a lot—but leaves the average U.S. tariff rate only a little reduced, and still at a historic high.”— Rana Sajedi, Maeva Cousin & Tom Orlik |
New data released today showed consumer prices unexpectedly cooled last month, and the Fed’s favored measure of underlying inflation declined to 2.8 percent in the year through March, according to the Bureau of Labor Statistics (BLS). Still, many analysts continue to expect that the administration’s increased use of tariffs will bring both higher inflation and slower economic growth.
The Fed’s wait-and-see stance is motivated by several factors. Officials want to guard against the possibility that any tariff-related pickup in inflation might become long-lasting. Powell has said that while tariffs are highly likely to generate a temporary increase in inflation, it’s also possible that the effects could be more persistent.
“Powell probably has his eye on the prize: continued price stability,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “He certainly is unwilling to put a safety net under a recession that actually hasn’t happened.” Tang predicts that the Fed won’t cut rates this year. “Longer-term inflation expectations have been quite stable. The issue is how long can they remain stable when you have a price shock,” he said.
Officials are already seeing some tariff-related warning signs in the economic data. They’ve pointed to a recent pickup in goods inflation, for example. They’re also monitoring a rise in Americans’ inflation expectations that is largely being driven by tariffs. Most measures of long-run expectations remain well-anchored, but if those gauges start to slide upwards, that would make it harder for the Fed to wrestle down inflation.
The Fed’s own late response to the post-pandemic inflation surge may also be weighing on policymakers. After making substantial progress in cooling price growth, they will be loath to make another policy misstep and see their work undone. Inflation, as measured by the Fed’s preferred gauge, was 2.5 percent in the year through February, still above the central bank’s 2 percent goal, though well below the multidecade high of 7.2 percent reached in 2022. They also view the economy as still on solid footing for now, despite headwinds. Data continues to paint a picture of a stable labor market, giving officials further confidence they’re right to remain on pause. Trump’s vacillating announcements on tariffs have led to substantial volatility in financial markets and a downturn in consumer sentiment, but Fed officials don’t yet see those developments as warranting a policy adjustment.
For the moment, at least, officials say they’re well positioned to respond as more clarity emerges. “We’re going to need to wait and see how this plays out before we can start to make those adjustments,” Powell said last Friday.
It would likely take widespread layoffs, a sharp move higher in filings for unemployment benefits, and a significant rise in joblessness for the Fed to move more aggressively, said Jeremy Schwartz, U.S. economist at Nomura. He forecasts one rate cut this year, in December. “Not only is inflation too high—and it’s been above target for years and years now—but also it’s going to be moving against them,” he said. “Cutting in that backdrop really risks the Fed’s credibility on getting inflation back to target.”
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