The March surge has been attributed to “front-loading,” or importers rushing to build their inventories before the broader Trump tariffs, announced on April 2, which Trump labelled “Liberation Day,” could take effect. The existence of those inflated stocks means the impact of the tariffs on prices for consumers would take some time to filter through to inflation data.
There’s also a sense from the anecdotal evidence that companies are waiting for the dust to settle and a clearer picture of the final tariff settings to emerge before acting.
Fed chair Jerome Powell. The central bank will want to wait until the full picture of the tariffs and the effect they have on the inflation numbers is fully reflected before cutting rates.Credit: AP
The Fed’s “Beige Book” – a compilation of surveys undertaken by the 12 regional Fed banks, said last week that there had been “widespread” reports from companies that they expected costs and prices to rise at a faster rate, with some of the districts reporting that those survey expected the cost increases to be “strong, significant or substantial.”
All the district reports, the Fed said, indicated that higher tariff rates were putting upward pressure on costs and prices and that the companies that planned to pass through tariff-related costs to customers expected to do so within three months.
That fits with what consumer-facing companies have been saying in their investor presentations and makes sense. They are saying that the tariffs are too material to be absorbed and will be passed on.
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Allowing for the buffer provided by the front-loading of imports in March, the question mark over what will happen when the pause on the reciprocal tariffs ends and a reluctance of companies to increase prices and lose sales until they actually experience cost increases that they expect to persist, the impact of the tariffs could be expected to show up progressively over the rest of the year.
Data over the next three to six months will better reflect the impacts of the tariffs.
Nevertheless, there were some early indications that the effects of Trump’s earliest tariffs are showing up.
The prices of major appliances, for instance, jumped nearly 4.5 per cent last month. They were included in Trump’s February tariff announcements.
The prices of perishables like bananas and vegetables, where supply can’t be front-loaded, rose significantly, as did toys, a segment China dominates.
The price hikes in those categories were offset by a decline in the prices of new cars, a segment where the tariffs are expected to eventually have a substantial impact, eggs, gasoline and air fares. US oil prices have fallen more than 15 per cent this year amid a global glut of oil. West Texas Intermediate prices bottomed out around $US60 a barrel in May and are now trading around $US68 a barrel.
Data over the next three to six months will better reflect the impacts of the tariffs on the US economy.Credit: Bloomberg
The drop in airfares, which reflects a slump in demand, may have something to do with Trump’s immigration policies and the harsh treatment of visitors to the US by US Customs and Border Protection personnel.
While the May data might appear benign, it is improbable that the Fed will heed Trump’s call for a percentage point cut to the federal funds rate when its Open Market Committee meets next week. The markets are assigning zero probability to a cut, although the odds on one in September improved from 60 per cent to 70 per cent after the inflation data was released.
The Fed will want to wait until the full picture of the tariffs and the effect they have on the inflation numbers is fully reflected. It will also want to understand the dynamic between the tariffs’ impacts on prices and their impacts on the underlying economy.
It is conceivable that the tariffs, the likely price increases associated with them and the uncertainty generated by the way they have been announced – they’ve evolved unpredictably and appear dependent on Trump’s volatile moods – will lead to materially lower US economic growth, which would reduce demand and blunt the inflationary impact of the tariffs.
It’s also conceivable that the outcome could be shrinking growth and spiking inflation – stagflation – which would force the Fed to choose between combatting inflation or saving jobs.
That’s why the safest course for the Fed at this point is to sit on its hands until it has more useful data.
Trump, of course, has always advocated for lower interest rates and has routinely verbally assaulted the Fed chair, Jerome Powell, for not delivering them. He needs them more than ever, with the Congressional Budget Office saying his “One Big Beautiful Bill” – his budget bill – would add $US3 trillion to US government debt over the next decade if enacted in its current form.
Trump, on his Truth Social platform, in posting his plea for the Fed to cut rates, added that the US “WOULD PAY MUCH LESS INTEREST ON DEBT COMING DUE. SO IMPORTANT!!!.” The Republicans are tearing themselves apart – fiscal conservatives versus the Trumpists – in negotiations over the bill. Lower debt-servicing costs would help his cause.
It doesn’t seem to have occurred to Trump and his advisers that damaging the credibility of Powell and the Fed would be damaging to the US economy and markets and would be more likely to increase the perceived risk of investing in the US.
The likelihood that the Fed will wait until at least September, if not later, before seriously contemplating a cut has led to new speculation that Trump will move to undermine Powell, reviving and refining a plan schemed up by Bessent during last year’s election campaign.
Powell, whose term as chair of the Fed (but not as a governor) expires in May next year, can’t be removed by Trump. Bessent suggested that a “shadow” governor should be announced, one who would provide their own commentary on rates and inflation and, because they would be Powell’s successor, increasingly undermine Powell and the Fed’s credibility.
There is speculation that such an appointment is imminent, with Bessent himself and former Fed governor Kevin Warsh, who lost out in the contest for the role of Treasury Secretary to Bessent, the front-runners.
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It doesn’t seem to have occurred to Trump and his advisers that damaging the credibility of Powell and the Fed would be damaging to the US economy and markets and would be more likely to increase the perceived risk of investing in the US. It could lead to higher, not lower, interest rates if it makes US monetary policy less credible and predictable.
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