Then he went onto say that with policy in restrictive territory the outlook and shifting balance of risks might warrant adjusting the policy stance – i.e. a rate cut.
The awkward position the Fed finds itself in is that on both sides of its mandate there are novel Donald Trump-inspired uncertainties.
Ansell says price rises will offset Donald Trump’s tariffs on its products.Credit: AP
The inflation rate, already materially above the Fed’s 2 per cent target rate, is picking up gradually as Trump’s tariffs start to impact.
Because the bulk of the globally applicable baseline tariffs only just started to come into effect this month, and US businesses had built significant pre-tariff inventories earlier in the year, they will show up progressively in the inflation rate through the rest of this year and into next year.
“The effects of tariffs on consumer prices are now clearly visible,” Powell said.
“We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts. The question that matters for monetary policy is whether those price increases are likely to materially raise the risk of an ongoing inflation problem.
Loading
“A reasonable base case is that the effects will be relatively short-lived – a one-time shift in the price level,” he said.
“It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed,” he said, noting that a decline in real incomes from higher prices could see workers demanding higher wages or that the price rises could lead to a lift in inflation expectations that dragged actual inflation up.
If the impact of the tariffs on inflation is uncertain, so is the impact of Trump’s immigration policies on the unemployment rate.
Last month’s contentious jobs report – the one that got the Bureau of Labor Statistics sacked by Trump – showed US employment growth is stalling, even though the unemployment rate remains at an historically low level of 4.2 per cent.
Markets heard what they wanted to hear. Credit: AP
Complicating assessment of the labour market, however, is that even as the growth in jobs has flat-lined, the supply of labour has also softened – the pool of job-seekers has been shrunk because of Trump’s harsh immigration policies.
“Overall, while the labour market appears to be in balance, it is a curious kind of balance that results in a slowing in both the supply and demand for workers., This unusual situation suggests that downside risks to employment are rising and, if those risks materialise, they can do so quickly in the form of sharply higher layoffs and rising unemployment,” Powell said.
So, both sides of the Fed’s mandate are under pressure but the data that the data-dependent Fed relies on is, at this point, inconclusive.
It remains very possible that both the inflation and unemployment rates could rise together.
Trump, having spent years attacking Powell, is ramping up his campaign to “MAGA-fy” th Fed.
The US economy is growing at about half the rate it did last year. Stagnation – low growth with relatively high inflation – remains a realistic possibility.
That would confront the Fed with a very difficult choice of which side of its mandate to prioritise.
Powell said it would not allow a one-time increase in prices to become an ongoing inflation problem, but when the risks to its dual mandate are evenly balanced, what does it do?
History would suggest it would prioritise the fight against inflation.
The Fed’s predicament is worsened by Trump’s continuing assaults on its independence.
If it is to retain the credibility that is essential to bond investors’ trust that it will act in accordance with its view of the economy’s best long term interests, rather than short term political pressures, it can’t be seen to be succumbing to Trump’s campaign for radically lower interest rates – he wants them 3 percentage points lower – in order to lower the interest costs on America’s exploding government debt levels and boost growth.
That could, while it retains its independence, make it more cautious than it might otherwise be, relying on data that reflects the recent economic past to justify a rate cut or hike.
Trump, having spent years attacking Powell, is ramping up his campaign to “MAGA-fy” th Fed.
He’s explored the possibility of sacking Powell, but doesn’t have that power. He tried to make a case that a blow-out in the cost of the Fed’s Washington headquarters provided a “cause” to fire Powell, but that effort fizzled.
He has nominated Stephen Miran, the chairman of his council of economic advisers and a man who has said the president should be able to hire and fire Fed governors, to fill a vacant seat on the central bank’s board.
Now, even as Powell delivered his address at Jackson Hole, Trump called for the resignation of a sitting Fed governor, Lisa Cook, and threatened to fire her after the Federal Housing Finance Agency director, Bill Pulte, alleged she had committed mortgage fraud.
Cook, whose term doesn’t expire until 2038, has said she won’t be “bullied” into resigning “because of some questions raised in a tweet.”
It is unclear, even if the allegation were proven, whether it would be serious enough to provide “cause” for her removal or whether Trump has the authority to fire a board member of a quasi private institution.
Nevertheless, the attack on Cook (using mortgage fraud allegations that Pulte has also deployed against other Trump adversaries like Democrat Adam Schiff and New York Attorney-General Letitia James) is, with the nomination of Miran, a clear signal that Trump isn’t going to abandon his efforts to gain influence over the Fed and its decision-making.
If Miran is confirmed by Congress, there will be three Trump-appointed people on the Fed’s seven-member board of governors. If he could force Cook out, there’d be a majority of Trump appointees.
The board doesn’t make interest rate decisions – those are made by the 12 members of the Open Market Committee, which includes the seven board members, the president of the New York Fed and four of the other 11 regional Fed presidents – but a strong Trump representation within those meetings could be intimidating, particularly as it is the Fed’s board that has the power to approve, or disapprove, the appointment of regional Fed presidents.
Loading
It doesn’t appear to have occurred to Trump that, if he does to the Fed what he’s done to the Department of Justice and the FBI and turns into another of his MAGA-fied instruments of his personal will, prejudices and vendettas, the Fed’s loss of its independence and credibility could have very unpleasant consequences for US interest rates, the sharemarket and the economy.
Powell understands nuance and the delicacy of the Fed’s position and decision-making. Trump doesn’t do nuance.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
