By Bloomberg News’s Amara Omeokwe
Economists generally believe that tariffs imposed by President Donald Trump will significantly increase inflation in the coming months. However, modest price increases thus far have challenged that presumption, giving the White House more confidence and creating rifts within the Fed.
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As it waits to see what happens, the U.S. central bank has refrained from lowering interest rates this year due to expectations of higher inflation. Fed Chair Jerome Powell is under tremendous pressure from the Trump administration to lower borrowing prices, and two Fed governors have publicly deviated from Powell in recent days, stating that a cut could be appropriate as early as July.
The central bank’s future course of action will be heavily influenced by two important reports in the upcoming weeks: the consumer prices report, which is due on July 15, and the monthly jobs report, which is due on Thursday. Though any surprises could alter the rate-cutting timeline, both are anticipated to finally start reflecting the effects of tariffs.
William English, a professor at the Yale School of Management and a former senior Fed economist, stated of the tariffs, “We just haven’t done this sort of experiment in the past, which is one of the things that makes it such a difficult situation.” It’s really hard to be sure about any forecast since we’re outside the spectrum of experience for a modern U.S. economy.
In recent weeks, Trump and his supporters have intensified their attacks on Powell and the Fed, spurred by evidence that inflation stayed low through May in spite of the tariffs. Powell has been the target of numerous insults from the president, who has called him a numbskull and one of the most foolish and damaging individuals in government.
Other members of the Trump administration and several Republicans in Congress, who are often more reluctant to comment on monetary policy, have also joined in. On June 23, White House National Economic Council director Kevin Hassett stated that there is absolutely no reason why the Fed should not lower interest rates at this time.
Hassett, who is viewed as Powell’s potential successor when the Fed chair’s tenure ends next year, highlighted data that is expected in the upcoming weeks: He stated, “I think they’re going to have to admit that they have the rate way too high if they see one more month of data.”
Additionally, after making the grave error of allowing inflation to run too high in 2022, Treasury Secretary Scott Bessent stated on Bloomberg TV Monday that Fed officials appear to be a little stuck at the wheel.
The discussion highlights the Fed’s precarious position as it attempts to steer clear of a policy blunder. Officials may eventually need to take more drastic actions if they lower rates right before tariff-induced price pressures start to take effect. However, keeping rates high to fight inflation that never happens runs the danger of unnecessarily slowing down the economy and maybe harming the labor market in the process.
Inflation is predicted to pick up speed in the upcoming months. Powell told Congress last week that as the levies spread throughout the economy, he anticipates significant price hikes to show up in June, July, and August statistics. However, he noted that Fed officials are completely open to the possibility that the impact would be less significant than anticipated, and if so, it would have implications for our policy.
Two weeks prior to the central bank’s next policy meeting, on July 15, the Bureau of Labor Statistics will release its June consumer pricing data. In defiance of Powell and their colleagues, Fed Governors Michelle Bowman and Christopher Waller, both Trump appointees, have hinted at a rate cut next month, if the data cooperates.
In a June 20 CNBC interview, Waller stated, “I think we’ve got room to bring it down, and then we can kind of see what happens with inflation.” He also added that the central bank could always pause rate reduction again if needed. The data has been good thus far throughout the six months that we have been on hold to wait and see.
However, according to federal funds futures, investors presently perceive only a 20% possibility of a July move and are instead placing bets that the next decrease will occur in September.
Despite Trump’s tariffs on dozens of U.S. trading partners and the general uncertainty around the duration and final level of the penalties, benign inflation readings through May indicate that businesses are, at least for the time being, finding methods to avoid price increases.
According to Josh Hirt, a senior U.S. economist at Vanguard Group, one possible explanation is that businesses are clearing out stockpiles of imports they frontloaded in the first quarter in order to avoid the tariffs.
Because so much was brought in before they went into force, Hirt’s calculations indicate that importers have, on average, paid an effective tariff rate this year that is lower than what Trump has implemented.
In his testimony, Powell also raised concerns about the exact distribution of tariff costs among importers, exporters, retailers, manufacturers, and consumers.
Powell stated that although the importer will first bear the levy, it will eventually be divided among the five, with data indicating that consumers will bear at least some of the burden.
Equally important monthly employment data, which is due from the BLS on July 3, comes before the July 15 inflation report. The Fed chair and many of his colleagues have been able to argue that a strong labor market indicates there is no rush to lower rates because there has been little evidence this year that tariffs have affected hiring.
However, forecasters have mainly insisted that any possible labor-market effects of the trade policy change would not be apparent prior to the June figures’ release, much like with the inflation data. According to a Bloomberg survey, analysts predict this week’s data would reveal that the June unemployment rate increased to 4.3%, the highest level since 2021.
In a speech on June 23, Bowman stated that Fed officials should acknowledge that, given recent expenditure slowness and indications of labor market fragility, downside risks to our employment mandate may soon become more prominent.
As consumers cut back on discretionary services like dining and vacation, May consumer spending fell, according to monthly data released Friday by the Bureau of Economic Analysis. Forecasters cautioned that rising costs in the coming months would further strain consumption.
According to English at Yale, the effects of tariffs will vary depending on variables that are hard to quantify. “But it just feels right,” he continued, “that there will be some pass-through of the tariffs to prices.” As of now, I don’t believe the main plot is incorrect.
(With Sonali Basak’s aid.)
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