The Fed is in a tough spot.
If these tariffs last, it could lead to 5% inflation in the US this year. Now many would argue that's a temporary shock that policymakers would look thorough but that harkens back to the the 'Team Temporary' talk that is a stain on Powell's legacy.
The market is now fully priced for a rate cut on June 18, with a high probability of another one at the subsequent meeting in July. Over the course of the coming year, there are 109 basis points.
I fear the Fed won't come to the rescue. Recent Fed commentary has been shifting more hawkish, not in the other direction.
Some examples:
- Kugler: There may be reasons why tariffs have more prolonged effects
- Goolsbee: Fear is if tariffs on imports jumps out of just imports and move into other costs, or people freak out and change behavior
- Williams: My forecast is that inflation will be relatively stable this year with upside risks ... Full impact of tariffs can play out over long horizon
- Daly said PCE data decreased her confidence in her forecast for two rate cuts this year
- Barkin warned not to assume just a one-time change in prices from tariffs
- Collins: Inflation risks are to the upside, it remains a question of how long tariff-driven inflation will last
There are no counter examples as these are all the Fed comments since the FOMC decision.
If Powell takes a more-hawkish tone, we should see another round of kicking-and-screaming in risk assets and a potential reversal of USD weakness. Then again, the market could also conclude that if the pain in equities is bad enough, the Fed put is still there.
