The June Meeting
The minutes of the last Fed meeting, released earlier this month, clearly show a division in opinion among Fed officials.[2] Governors Waller[3] and Bowman[4] (who were appointed by President Donald Trump) have publicly expressed the view that any inflationary effects from tariffs will be temporary only. If this is the case, rate cuts can be expected in the near future.
The majority of officials, however, appear to be concerned that the knock-on effects of the ongoing trade negotiations could be more severe and long-lasting. As the Fed chairman Jerome Powell himself said in the press conference, “Every outside forecaster, and the Fed [itself], is saying that we expect a meaningful amount of inflation to arrive in coming months.”[5]
As always, the Fed insists that its decisions must be forward-looking, while being guided by the emerging data. The data, so far, does not suggest cause for alarm. The question is how informative this backward-looking data is, given the unfolding trade situation.
The Latest Data
The Fed’s mandate is to control inflation and support the labor market. Both appear to be in a good position. The unemployment rate, already low by historical standards, moved downward to 4.1% in June, according to the latest figures.[6] Core PCE inflation ticked upwards slightly (from 2.6% to 2.7%)[7] in the latest reading, although it remains within range of the targeted 2%.
As can be seen from the graph, the last time inflation was at its current level, the Fed began to cut rates, and saw inflation begin to creep back up again. With tariffs added to the picture, it is understandable that the committee might be wary of provoking a similar resurgence.
Those who believe inflation is set to rise point to the fact that tariff effects have been delayed. For example, as a result of firms buying up inventory months in advance (“front-loading”), to avoid higher prices, or temporarily absorbing higher costs to shield consumers from their effects. Some believe that July is when the effects will begin to show in the data.[8]
The June CPI inflation figures, while showing a lower-than-expected increase for core CPI,[9] are still higher than in previous months, potentially lending weight to this view, although both sides maintain the data still supports their respective positions.
The Unfolding Drama
The trade negotiations themselves have continued on their erratic path, but a pattern is emerging. Both tariffs and deadlines are, in general, provisional rather than permanent - a prelude to the real trade discussions that then follow.
Talks between the US and China culminated in something of a truce on June 10th, with a ‘framework’ put in place in lieu of the original punitive tariff levels. With no other deals in place besides the UK and Vietnam, the original July 9th deadline has been extended to August 1st, as negotiations with other countries continue.[10]
This new deadline is, in Trump’s own words, ‘Firm, but not 100% firm’ - a phrase that accurately summarizes his psychological strategy of controlled chaos, which appears calculated to wear down the resolve of his global negotiating partners. By its nature, such a strategy has no clear end or outcome.
Conclusion
Closer to home, Trump appears to be waging a war of words on Fed Chairman Powell, urging him to lower rates by at least 3% and/or resign immediately.[11] Trump officials are also bringing pressure to bear on the embattled governor through other means, including accusations of mismanagement and overspending.[12]
When asked to respond at the June press conference, Powell essentially restated the Federal Reserve’s dual mandate, saying that to him and the committee members, pursuing this mandate is ‘all that matters’.[13]
Whatever one’s opinion of the Fed Chairman’s abilities, this attitude of remaining focused amid extraneous shocks is a lesson for all investors. The greatest enemy of an investment plan is often not the markets themselves, but the emotional response they provoke, and the ability to proceed calmly is therefore half the battle.
[6] Bureau of Labor Statistics