Uncertain Tariffs and the Fed's Monetary Policy
- Fed officials are taking a wait-and-see approach on President Donald Trump's tariff game, watching how it impacts the economy before making any monetary policy moves.
- Three Fed policy heavyweights emphasized their disappointment over the unclear trade policy, expressing uncertainty during separate public remarks on Tuesday.
- The Fed's expected hiatus on cutting the key fed funds rate is till September, according to expectations.
Fed's Daily Term: "Uncertainty" - a word that embodies the ambiguity surrounding economic forecasts and monetary policy decisions.
In the past two months since President Trump announced his "Liberation Day" tariffs, Fed officials have been struggling to grasp the repercussions of the ongoing trade war. They continue to deliberate on the central bank's benchmark interest rate.
These three officials spoke individually and spoke of the need for clarity on trade policy and the economy's response to the tariffs before making their moves. They reiterated fears that the erratic and ever-changing tariffs could send prices skyrocketing for consumers and slow economic growth.
Uncertainty: What's the Big Deal?
The Fed, tasked with controlling inflation and ensuring high employment through adjusting its referenced fed funds rate (a rate that influences borrowing costs on all loans), finds itself at a crossroads—should they cut the Fed funds rate to boost the economy and maintain low unemployment or keep rates hiked to keep inflation in check, which is above the Fed's desired 2% annually?
The impasse has led the Fed to opt for inaction, observing the economic landscape for signs of inflation or a spike in unemployment. Fortunately, neither has materialized thus far.
Raphael Bostic, president of the Federal Reserve Bank of Atlanta, expressed the Fed's sentiments in a Tuesday blog post.
Lisa D. Cook, a Federal Reserve governor, shared similar sentiments during a speech at the Council on Foreign Relations in New York.
Rate Cuts: A Distant Prospect?
Before Trump sparked his tariff campaign, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, believed the economy was sailing smoothly. If conditions returned to normal, the Fed would likely cut interest rates.
The Fed's strategy has not passed unscathed. Trump has voiced severe disapproval and expressed demands for lower rates. In response, officials, including Fed Chair Jerome Powell, insist they make policy decisions based on economic—rather than political—factors.
Market players have interpreted the Fed's indecisive stance as an indicator that the central bank will delay any rate cuts during the summer. As of Tuesday, investors were betting on a nearly 70% chance that the Fed will make at least one rate cut by September, according to the CME Group's FedWatch tool.
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- Amidst the ongoing trade war and President Trump's tariff changes, the Fed is facing challenges in determining its benchmark interest rate, with officials expressing concern about the impact of erratic tariffs on the economy.
- In a wait-and-see approach, the Fed is closely monitoring the economy for signs of inflation or unemployment spikes before making any decisions on rate cuts.
- With the general news of economic uncertainty and potential rate cuts, investors are betting on a high probability of at least one rate cut by September.
