Tariff inflation not a worry for the Fed – for now
Some traders say the Fed’s move to stay the target rates stem from it not knowing how Trump’s tariffs and the global trade war will play out
FEARS about the Trump administration’s trade war had grown so high in the stock market that Federal Reserve chairman Jerome Powell sparked a relief rally by pointing out that the worst-case stagflationary scenario had not come to pass … yet.
The central bank left rates unchanged in a range between 4.25 and 4.5 per cent, saying there was no rush to pre-empt either hyperinflation or recession because neither was emerging in the data.
For technical reasons, the Fed slowed sales of assets on its balance sheet. Stocks surged because the central bank reiterated its projections for two rate cuts in 2025, despite increasing consumer-inflation estimates to 2.8 per cent from 2.5 per cent, likely due to the impact of tariffs.
Traders interpreted the Fed’s refusal to change course as a sign that Powell was viewing tariff inflation as transitory.
To other observers, Powell was effectively throwing up his hands. The central bank was treading carefully, he seemed to say, because it was operating in the dark, due to the sudden breakout of a global trade war. Board members had kept their rate targets unchanged, not because they were confident in the accuracy of those targets, Powell hinted, but because those targets were as good as any.
“What would you write down?” he asked his audience, referring to the macroeconomic confusion caused by what he called the “tariff-on, tariff-off” threats from the Trump administration. “It’s really hard to know how this is going to work out.”
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At the same time, he echoed one of his favourite themes in the post-pandemic era: the resilience of the US economy. Unemployment and consumer spending data showed no signs of recession, the central banker noted. Powell acknowledged that “soft data” – surveys of consumer and business sentiment, had taken a turn for the worse because of the upheaval in Washington, DC, and worries about tariff impacts. But he noted that sentiment changes do not always lead to changes in financial behaviour.
“There are plenty of times when people say very downbeat things about the economy, then go out and buy a car,” he said.
Powell argued that the strength in the current employment data and relatively muted inflation gave the Fed the luxury of time to see if one-time price increases caused by tariffs spread through the economy. So far, it has not been clear what tariffs will stay, what retaliatory measures trading partners will take, what products and services would be affected by those tariffs, and how it all will interact with other economic trends.
Jack McIntyre, portfolio manager at money manager Brandywine Global, wrote in a note to clients: “You could define the March [Fed] meeting with one word: uncertainty. That term was peppered throughout both the [Fed] statement and Powell’s press conference. Therefore, it wasn’t a dovish or hawkish pause, but an uncertain pause.”
Some reporters pressed Powell on apparent inconsistencies in his sanguine position. Some pointed out that he was making the argument that tariff inflation would be a transitory event, suggested by the central bank’s refusal to alter rate projections or long-term inflation targets, despite a relatively large adjustment to short-term inflation expectations.
Was this not an echo of his famous mistake about post-pandemic inflation? The Fed chairman had insisted that it would be transitory, and therefore did not warrant rate hikes for more than a year – before launching one of the most aggressive rate-hike campaigns in history to fight it.
Powell insisted that the situations were very different, and pointedly referred to the 2017 tariffs, which had produced transitory inflation (Wall Street economists point out that those tariffs were relatively targeted and narrow in scope, compared to the latest ones.)
In contrast to the volatile messages from Trump and Treasury Secretary Scott Bessent on trade and the implications, Powell struck a calm and measured tone. He gave stock and bond markets an avuncular message, effectively saying, “Don’t worry ... It might never happen.”
Strategists at Standard Chartered, in a note to clients, wrote: “The takeaway is that the Fed will watch for signals that hard data confirm soft survey data, and that the price effects of tariffs are not spreading more broadly beyond the tradable goods sector.”
The broad S&P 500 is still roughly 8 per cent below its February peak, but is up about 3 per cent from recent lows and seems to be finding its feet again. Perhaps the bulls can learn to live with the trade war.
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