In a surprising turn of events, Federal Reserve Chairman Jerome Powell has reversed course on a long-held view, acknowledging that tariffs do not drive ongoing inflation during a recent speech.
According to Fox News, this shift, revealed last Friday at Jackson Hole, could signal potential interest rate cuts as early as September, reshaping market expectations and monetary policy debates.
Powell's address at the annual economic symposium in Jackson Hole marked a notable departure from previous Federal Reserve stances on trade policies. He explained that tariffs lead to a single price adjustment rather than a sustained rise in inflation. This perspective aligns with arguments from the Trump administration, which has maintained that foreign exporters absorb most tariff costs.
The Trump team has emphasized that major trading partners, burdened by a $1 trillion annual U.S. trade deficit, rely heavily on access to American markets. They argue this dependency forces foreign entities to bear tariff expenses rather than passing them on to U.S. consumers.
However, some concerns linger that Powell may not fully grasp this dynamic, potentially underestimating the limited impact on domestic prices.
Following Powell's remarks, financial markets reacted swiftly with optimism about future Fed actions. The Dow Jones Industrial Average soared past 45,000, with some analysts predicting a climb to 50,000. Meanwhile, yields on 10- and 30-year Treasuries fell, triggering a sharp rise in bond prices.
Wall Street interpreted Powell’s comments as a dovish hint, suggesting a possible rate cut at the Fed’s September meeting. Analysts are split on whether the cut will be a modest 25 basis points or a more significant reduction. Such a move would mark a shift from the current restrictive policy, which Powell indicated may no longer be justified by tariff-related uncertainties.
Currently, the Fed’s interest rates stand between 4.25% and 4.50%, far exceeding those of global counterparts like the European Central Bank at 2% and the Bank of Japan at 0.5%. China’s seven-day repo rate, at 1.4%, further highlights the disparity, placing U.S. rates among the highest worldwide. These elevated rates contribute to steep mortgage costs, with 30-year fixed rates ranging from 6% to 7%, double the levels seen before the pandemic.
High mortgage rates have locked many young families out of homeownership, stalling a key sector of the economy. Residential construction, often a driver of U.S. economic recovery, has also slowed significantly due to these financing challenges. Small businesses, facing double-digit loan rates, struggle to expand or create jobs under the current monetary environment.
Consumers are not spared, as higher costs for credit cards and auto loans add to financial strain. Meanwhile, U.S. manufacturers and exporters face disadvantages due to a strong dollar, fueled by high rates. This currency distortion makes American goods pricier abroad, allowing foreign competitors to gain market share.
The real, inflation-adjusted U.S. rates are at their highest in nearly two decades, a situation some economists describe as excessive tightening. In contrast, economic indicators point to disinflation, with headline CPI near 3% year-on-year and the Fed’s preferred PCE measure around 2.5%. Energy prices remain subdued, supply chains have stabilized, and wage growth shows signs of leveling off.
During Donald Trump’s first term, tariffs on steel, aluminum, and Chinese goods were implemented without triggering the predicted inflation. Instead, the economy saw robust growth and stable prices, supporting the argument for what has been termed "Trumpnomics." This approach, combining tax reductions, deregulation, energy strategies, and trade fairness, is credited with economic success then and optimism for similar results now.
Given the current economic landscape, some argue that a modest 25-basis-point cut in September would be insufficient. Suggestions for a reduction of up to 100 basis points have surfaced, aiming to better align U.S. rates with global levels. Such a move could provide relief to American families, farmers, and exporters grappling with high borrowing costs.
Powell’s acknowledgment at Jackson Hole has sparked a broader discussion on the Fed’s role in balancing trade policy and monetary strategy. As markets and policymakers await the September decision, the pressure mounts for the Fed to address domestic economic challenges. The outcome could redefine the central bank’s approach, potentially easing the burden on key sectors while navigating global economic dynamics.