The subject of Trump’s ire appeared unmoved. During his press conference following the Fed’s decision, Powell argued that there were no obvious signs that the economy was weakening enough to justify a rate cut. “Despite elevated uncertainty, the economy is in a solid position,” he stated. “For the time being, we are well-positioned to learn more about the likely course of the economy and the evolving balance of risks before adjusting our policy stance.”
Translated from Fed-speak: It’s simply too early to say whether possible cracks are emerging in a fairly strong economy. “Growth in the first half of the year was slow, which says you should cut interest rates, and inflation in the first half of the year was high, which says you should raise interest rates,” Jason Furman, a professor of economics at Harvard University and former chair of the Council of Economic Advisors, told TMD. A Wednesday report from the Bureau of Economic Analysis found that the U.S. economy grew at a 3 percent rate in the second quarter, reversing a 0.5 percent decline in the first quarter.
Both numbers, however, are largely due to the fact that imports spiked in the first quarter as businesses sought to stockpile goods in advance of increasing tariffs, and then fell sharply in the second quarter. Imports are subtracted from GDP as a way to calculate overall economic production, even if a “contraction” caused by a sharp rise in imports is more about mathematics than underlying economic reality.
These sorts of mixed messages have made the debate on the Fed board a battle between those who favor proactivity and those who, like Powell, are adopting a more reactive approach. Multiple members of the rate-setting committee disagreeing with a policy decision has not happened since 1993, a development which some experts greeted as an encouraging sign of healthy debate, as well as a reflection of the difficulty of the decision facing the Fed.
“I think it’s healthy,” said David Beckworth, the head of the monetary policy program at George Mason University’s Mercatus Center, pointing to the fact that other central banks like the Bank of England often feature more public division than the Fed. “To pretend these things are obvious is, I think, as a general matter wrong,” Furman agreed.
Christopher Waller and Michelle Bowman, the two dissenters, have argued that the Fed is at risk of being caught flat-footed by rising unemployment. “With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate,” said Waller in a speech at New York University earlier this month.
However, near target is not the same thing as on target. The Fed’s preferred inflation measure, the Personal Consumption Expenditures index, was released on Thursday by the Commerce Department, showing inflation at 2.6 percent, stubbornly above the Fed’s 2 percent target. In June, the measure rose 0.3 percent month-over-month, a slight uptick from May’s rate. Excluding volatile food and energy prices, the 12-month inflation rate was at 2.8 percent.
Why, then, does Waller think the time is ripe for a rate cut? As he argued in his NYU speech, there is some evidence that the U.S. economy’s “momentum has slowed significantly.” Waller pointed to a slower rate of growth for consumer spending, slowing retail sales, and decidedly uncertain business sentiment. He also noted that private payroll employment growth has dropped substantially, declaring that the numbers were “near stall speed and flashing red.”
The effect of Trump’s tariff policies on the economy is another major source of uncertainty for the board of governors. “The data point to very small goods price increases relative to the size of the tariff rates,” said Waller, predicting that any increase in prices caused by tariffs would fade after roughly a year. In his press conference, Powell was more uncertain. “Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen,” he said. “But it is also possible that the inflationary effects could instead be more persistent.”
The decision to hold rates steady tamped down on investors’ expectations of a rate cut in September, with many anticipating that the Fed’s wait-and-see approach could last for some time yet. The Fedwatch tool, published by the CME group, put the chance of lower rates next month at around 38 percent as of Thursday afternoon.
Last night was also the deadline set by Trump for a host of countries around the world to either make trade deals with the U.S. or face steep tariffs. Just after 7 p.m. ET, Trump issued an executive order outlining a new tariff regime: A baseline rate of 10 percent will be imposed on countries with which the U.S. has a trade surplus, which is most countries in the world. But for countries with which the U.S. has a trade deficit, or that the administration determines are engaging in unfair trade practices, new tariffs are at least 15 percent and as high as 41 percent, outlined in a table that includes roughly 70 countries and territories and the European Union.
And some countries secured extensions ahead of Trump’s announcement. Mexico, the U.S.’s largest trading partner, received a 90-day extension just hours before tariffs were set to go into effect, although the pre-existing 25 percent tariff on all goods from Mexico not covered by the U.S.-Mexico-Canada (USMCA) trade agreement will remain. “Within this new world trade order, we have the best possible agreement,” Mexican President Claudia Sheinbaum told reporters. China had also already negotiated an August 12 deadline to reach a trade deal with Washington.
The pause with Mexico left Canada as the only major U.S. trading partner without either a trade deal or more time to continue negotiating. And later in the evening, Canada’s position only got worse. Trump announced that the U.S. would impose a 35 percent tariff on all goods not covered by the USMCA, citing Canada’s alleged “continued failure” to stop the flow of drugs across the northern border. The new rate went into effect this morning.
What does this all mean for the Fed? Essentially, even more uncertainty. If Trump’s latest duties take effect next week, the U.S. will have imposed significantly higher tariffs on the rest of the world. While economists debate the extent to which tariffs will raise prices and how long those inflationary effects will last, nearly all agree that the sweeping taxes on imports will be felt in some way by the American consumer.
With the tariff deadline having come and gone (and in some cases, been extended), the Fed continues to gaze at a murky economic picture. “Some of the trade issues have been settled, but some of them haven’t,” said Furman. “There’s a huge amount of uncertainty about how the trade stuff will affect the economy.” For now, Powell and most of his fellow committee members have decided that they need to wait.
