One question follows Federal Reserve dog officials as President Trump's efforts to rebuild the world trade system with vast tariffs begin to take shape. How will these policies affect central bank plans to cut interest rates?
The influential federal governor revealed Monday that he doesn't expect Trump's policies to derail the Fed's efforts to control inflation, and instead fresh interest rate cuts will continue to be affirmed this year It suggests that they are still playing.
“My baseline view is that tariff levies will increase not only slightly in a slightly higher price, but only in unrealistic ways,” official Christopher J. Waller said on Monday. He said this in a statement at an event held in Australia in the evening. “So when setting monetary policies to maximize our capabilities, I prefer to look into these effects.”
Economists are concerned that tariffs, essentially taxing American consumers, will raise slower prices for economic growth, at least temporarily and over time.
Waller acknowledged that the economic impact of tariffs could be greater than expected depending on how they are structured and installed later. However, he suggested that price increases from tariffs could be slowed by other policies. This could be “positive supply effect and put downward pressure on inflation.”
Waller's view is important given that he is one of the seven officials who make up the board and vote at all policy meetings.
In addition to tariffs, Trump has increased domestic energy production, deregulation and tax cuts, and has added other pillars of the economic agenda. His administration is also pursuing a massive deportation of illegal immigrants, but government spending cuts have also partially cut the federal workforce.
So far, Fed officials have been hesitant to guess exactly what these changes mean for the economy and ultimately the path to interest rates. Borrowing costs reached 4.25% and 4.5% last month after the Fed chose to choose for further reductions until they gained more confidence that inflation was actually under control.
The last time the central bank had to deal with the long-term trade war was in 2018, during Trump's first term at the White House. However, the economic background compared to today did not appear any more different.
Inflation was curbed and consistently filmed the Fed's 2% target. Interest rates were much lower than that, hovering around 2%. The outlook for economic growth has also become pessimistic as companies regained large ticket investments. This dynamic gives the Fed the flexibility to respond preemptively to avoid a much larger slowdown in the US, with interest rates falling by three-quarters per percentage point by the end of 2019.
This “through-through” playbook may hold this time around concerns about growth from tariffs that could result in a temporary rise in consumer prices. However, consumers still feel the late stages of the worst inflation shock in nearly 40 years, and remain on future price increases, complicating the situation for policymakers.
Fed officials got more unwelcome news on the inflation front last week after the latest consumer price index report showed a resurgence in January. The main perpetrators have skyrocketed grocery prices, rising by a 15% jump in egg prices due to the ongoing bird flu outbreak and rising energy costs.
Even with these volatile items removed, so-called “core” inflation rose at its fastest monthly rate in about two years.
The alarm has been relaxed after the release of the producer's price index. This tracks how much a company pays in goods and services to make what it sells. This index suggests that overall inflation measured by the Fed's preferred personal consumption expenditure index is more modest than initially feared.
Waller deemed the data “somewhat disappointing,” saying that overall inflation has far surpassed the Fed's target amid the “extremely slow” advances over the past year.
However, he raised questions about what signals he would draw from the latest data. Consumer price growth tends to be higher at the beginning of the year before slowing down in the second half. Waller and other economists attribute it to seasonal habits that could obscure the real pace.
A study from central bank economists shows that this dynamic has occurred in 16 of the last 22 years. In another speech Monday, Federal Reserve Bank of Philadelphia Chairman Patrick Harker said CPI inflation in January exceeded expectations of nine of the 10 in the past decade.
“If this winter lull is temporary, like last year, then further policy easing will be appropriate,” Waller said in his remarks. “But until that's clear, I prefer to stabilize the policy rate.”
Another Fed governor, Michelle Bowman, supported her support on Monday for a “cautious and progressive” approach to additional interest rate cuts. Bowman said she still hoped it would happen this year while awaiting further evidence that inflation was being eased. It is a stance that most central bank officials employ to some extent, encouraged by a solid labor market.
Bowman also said he wants “clearness” about what the Trump administration has planned.
“It's very important to have a better understanding of these policies, how they will be implemented, and establish greater confidence in how the economy will respond in the coming weeks and months.” She said. Like Waller, Bowman was appointed by Trump to the Fed during his first term.
The president and his staff adopted a more measured tone when talking about their ability to tame inflation after vowing to beat it on “day 1.”
Kevin Hassett, director of Trump's National Economic Council, told CBS News on Sunday that the administration has “a multifaceted plan to end inflation.” Increased energy production.
Still, investors have reduced expectations about how much the Fed will fall this year. They also pushed back the timing of these moves of concern that came together as Trump's policies led to higher inflation. Futures Markets now refers to a quarter-point cut in December.
Harker said Monday that inflation will not only decrease over time, but interest rates will “have a lower long term.”
“This does not mean there are no potential concerns,” he added. “In fact, the only thing I can say for certain is that there is a lot of uncertainty.”
