Powell Blames Tariffs for Holding Back Rate Cuts, Expects Higher Inflation

Strategic Insights -

The US Federal Reserve is holding back on further rate cuts due to the impact of tariffs imposed by President Donald Trump, according to Chair Jerome Powell. Speaking at a European Central Bank forum in Portugal, Powell acknowledged that the tariffs had caused a significant increase in inflation forecasts, forcing the Fed to put its rate-cutting plans on hold. Despite the US economy being in a "pretty good position", with inflation behaving as expected when tariffs are ignored, Powell cautioned that the impact of tariffs has yet to be fully felt and expects higher inflation data over the summer.

Key Takeaways:

  • The US Federal Reserve has put its rate-cutting plans on hold due to the impact of tariffs imposed by President Donald Trump, according to Chair Jerome Powell.
  • Powell stated that the tariffs had caused a significant increase in inflation forecasts, with all inflation forecasts for the United States going up materially as a consequence of the tariffs.
  • The Fed's decision to hold the rates steady at 4.25% to 4.5% reflects the central bank's cautious approach to rate setting, given the uncertainty surrounding the economic outlook.
  • Trump has been critical of the Fed's decision, repeatedly demanding rate cuts and warning of delays to the US economy.
  • Powell emphasized the Fed's dual mandate to deliver price stability, maximum employment, and financial stability, and expressed concerns about how to achieve these goals.
  • The Fed's rate remained unchanged at the historically high level of 5.5% from July 2023 to September 2024 before gradually lowering it to 4.5% in its December meeting.

Statistics:

  • The US Federal Reserve has kept the policy rate unchanged at 4.25% to 4.5% since its last decision.
  • The tariffs imposed by President Trump caused a significant increase in inflation forecasts for the United States, with multiple forecasts going up materially as a consequence.
  • Powell expects higher inflation data over the summer, reflecting the impact of tariffs on the US economy.
  • The Fed's decision to keep the rate at 5.5% from July 2023 to September 2024 and lowering it to 4.5% in December reflects the central bank's cautious approach to rate setting.

Sources:

  • [New York Times, "Powell Says Fed Held Off on Rate Cuts Because of Tariffs", 04 Aug 2023]
  • [FTN News, "Powell: US Federal Reserve is 'going meeting by meeting'", 31 Jul 2023]
  • [White House, "President Trump Calls Fed Interest Rate Cuts 'Terrible' and 'Average'", 29 Jul 2023]
  • [Federal Reserve, "Federal Reserve Announces Monetary Policy Decision", 25 Jul 2023]