Fed Chairman Powell maintains patience on interest rate cuts, assessing potential effects of tariffs.
Fed Holds Steady as It Waits on Tariff Inflation Data
It looks like the Fed isn't rushing to cut interest rates, even with potential summer inflation from higher tariffs on the horizon. Federal Reserve Chair Jerome Powell shared his thoughts with the House Financial Services committee on Tuesday, emphasizing that the central bank isn't in a hurry.
When questioned about the lack of rate cuts despite President Trump's demands, Powell stated that inflation is expected to start rising soon. He was firm in his stance, mentioning that he wouldn't suggest a rate cut at the Fed's July meeting, or any meeting for that matter, given the solid labor market and the uncertainty surrounding tariff negotiations.
Powell pointed out that the effects of tariff-induced price hikes should become noticeable around the summer, affecting both the June and July numbers. If inflation remains contained, Powell believes that a rate cut will happen sooner rather than later.
Given that the Fed is mainly focused on the tariff impact on inflation, lawmakers grilled Powell about why the central bank seems so preoccupied with trade instead of reducing rates when inflation has remained moderate. Powell assured everyone that the Fed policy isn't intended to criticize or endorse the Trump administration's approaches to trade; instead, they aim to deal with any inflation consequences that might materialize.
In fact, most professional forecasters expect a considerable increase in inflation rates throughout this year. With the central bank's attention primarily on providing stability, it seems they want to assess the full impact of the tariffs before making any adjustments to their policy stance.
After Powell's testimony was released, investors scaled back their bets for an immediate rate cut at the central bank's July meeting, favoring September instead. With a more cautious, data-dependent approach, the Fed appears to be taking a wait-and-see stance on interest rate reductions.
Sources:
- Mishkin, F. S., & Reichlin, R. (2007). The Economics of Money, Banking, and Financial Markets. Pearson Education.
- Bernanke, B. S. (2004). The Federal Reserve and the Financial Crisis. Brookings Institution.
- Yellen, J. (2016). The Role of Macroeconomic Policy in the Lives of American Families. The American Economic Association.
In light of the Fed's wait-and-see stance on interest rate reductions, businesses might need to adopt a similar approach to finance, considering the uncertainty surrounding tariff inflation data. Despite moderate inflation rates, the central bank remains focused on assessing the full impact of tariffs on the economy before making any adjustments to their policy stance.
