An Urban's Rural View

Jerome Powell and Donald Trump continue to be on different pages. The president wants big interest rates cuts from the Federal Reserve and he's stepped up his attacks on the Fed's chair for not granting his wish. Recently he has called Powell, the man he appointed to the job in 2018, a "numbskull" and a "stupid person."

On June 18 Powell's Fed once again defied the president by announcing it was holding its benchmark federal funds interest rate steady rather than cutting. The only consolation for proponents of cuts was in the so-called "dot plot," where policy makers indicate their expectations for future interest rates. (https://www.federalreserve.gov/…)

The dot plot shows 10 of the 19 members of the rate-setting Federal Open Market Committee expecting two interest rate cuts by the end of the year. But two others forecast only one cut and seven saw the Fed continuing to hold steady this year, up from four the last time the committee members made projections in March.

That these are just forecasts bears repeating. The Wall Street Journal's Nick Timiraos pointed out that at its meeting in June of 2024, the dot plotters' median projection was for a single quarter-point cut the rest of the year. Instead, starting with the September meeting, the Fed cut rates a full percentage point. (https://www.wsj.com/…)

Does the president have a point? After all, the latest inflation readings have been better than expected and there have been signs of the economy starting to weaken. What is the Fed waiting for?

That's easy. It's waiting for clarity on the effects of tariffs on inflation and inflationary expectations.

Fed officials lack that clarity now for several reasons. For one, it's uncertain where tariff levels will end up. The administration has raised many tariffs significantly, suspended some and reached final agreement with only one trading partner, the United Kingdom.

Once tariff levels become clear, to what extent will businesses pass the increased costs on to consumers in lower prices? Could they decide to accept -- or be forced by diminishing demand to accept -- lower profits instead?

The Fed must also worry about how the public will react to tariff-induced inflation. Will it be seen as a one-off event or the beginning of an inflationary run?

In his opening statement at the post-meeting press conference, Powell said, "Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem." (https://www.federalreserve.gov/…)

The effects of tariffs haven't yet shown up in the latest inflation statistics. They've reported prices rising between 2% and 3% a year, higher than the Fed's 2% target but lower than some analysts expected. But as Powell noted at the press conference, many goods on store shelves today were imported months ago.

It's true that after announcing very high "reciprocal" tariffs in April, Trump has relented to some extent. But they still seem likely to end up at the highest levels in decades.

"We feel like we're going to learn a lot more over the summer on tariffs," Powell said.

While there have been signs of economic weakness, they weren't, in Fed officials' estimation, weak enough to require rate cuts. The Fed sees a "solid" labor market with the unemployment rate peaking at 4.5%, up from 4.2% currently but still relatively low.

Powell admitted the Fed could end up in a "challenging scenario" where a softening economy could be calling for a rate cut while rising inflation called for a rate increase. But, he said, "For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance."

The president said lower interest rates would enable the Treasury to fund the government's debt at a lower cost. The Fed's mandate from Congress, however, is to keep prices stable and jobs plentiful, not to help the Treasury sell bonds.

If Powell is, in the president's word, "stupid," he sure has a lot of company. All 12 of the voting members of the rate-setting committee agreed to keep rates steady.

Markets are betting the economy will weaken to the point where the Fed will end up cutting a couple times this year. But there are plenty of smart investors on both sides of that bet. There are even smart people who think the Fed's next rate move will be an increase.

Once we get a bit more clarity on tariffs and their effects, we'll know who won the bet.

Urban Lehner can be reached at urbanize@gmail.com

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