DIFFERENT THIS TIME
Powell, in response to other questions during the hearing, noted the Fed has no modern example of tariff increases of the size Trump is considering, with the tariffs Trump imposed in his first term far smaller than what seems likely now and enacted at a time when inflation was low.
The fact that inflation has been above the Fed’s 2 per cent target for roughly four years, Fed officials worry, may make a new surge in prices more likely to turn into a more persistent round of price increases.
“This is different,” Powell said. “There is not a modern precedent.”
Even with recent inflation more moderate than expected, the central bank expects rising import taxes will lead to higher inflation beginning this summer, Powell said, and the Fed won’t be comfortable cutting interest rates until officials see if prices do begin to rise.
“We should start to see this over the summer, in the June number and the July number…If we don’t, we are perfectly open to the idea that the pass-through (to consumers) will be less than we think, and if we do that will matter for policy,” Powell said during the House hearing on Tuesday.
Tariffs have already risen on some goods, but there is a coming Jul 9 deadline for higher levies on a broad set of countries, with no certainty about whether the Trump administration will back down to a 10 per cent baseline tariff that analysts are using as a minimum, or impose something more aggressive.
The Fed has held its benchmark interest rate steady in the 4.25 per cent to 4.5 per cent range since December.
Economic projections released by the Fed last week showed policymakers at the median do anticipate reducing the benchmark overnight rate half a percentage point by the end of the year. But within those projections is a clear divide between officials who take the inflation risk more seriously – seven of 19 policymakers see no rate cuts at all this year – and those who feel any tariff price shock will be less severe or quickly fade. Ten of the 19 see two or more rate reductions.