00:00 Speaker A
Fed chair Jay Powell says that bigger than expected tariffs could lead to longer lasting inflation, a change in an initial view put forth a couple weeks ago where inflation from tariffs could prove temporary, while also noting that the Fed is unclear what they’re going to do with interest rates at the moment. In a speech in Northern Virginia, Powell says quote, “It’s now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of economic effects, which will include higher inflation and slower growth.” He says that the outlook is highly uncertain right now, and that there are elevated risks to the downside for inflation and employment, though at the moment the economy looks to be in solid shape. He says higher tariffs are likely to rise in, raise inflation in the coming quarters. Powell says that avoiding longer lasting inflation will depend on keeping longer term inflation expectations in check, the size of the effects from tariffs, and how long it takes for tariffs to work their way through to prices. Now, the Fed chair stressed that the set, it is the central bank’s job to ensure that a one-time increase in prices does not lead to ongoing inflation. He says the central bank is properly positioned now to await clarity before making any adjustments to interest rates, saying that quote, “It’s too soon to say what the appropriate path for policy will be.” So Julie, very much a wait and see right now but committed to keeping inflation in check. Back to you.
02:54 Speaker B
And of course President Trump weighing in on all of this today saying it’s the perfect time for Powell to cut rates. Um, of course, Powell has remained steadfastly a political right in his, uh, in his various press conferences, but as you and I have talked about, and you’ve written about, the the Fed’s in a tight spot right now in terms of where these tariffs position inflation versus growth.
03:49 Speaker A
Yeah, I mean, Julie, look, it’s kind of like the president’s trying to force the Fed’s hand, but I think you could also say that the bond market is doing the Fed’s job for it, because you look at the yield on the 10-year Treasury today, and it’s below 4%. So while the Fed adjusts rates at the very short end of the curve, that dominoes through to other interest rates in our economy. It’s ultimately the yield on the 10-year Treasury that’s really setting a lot of these longer term borrowing costs, and that can be buffeted by much more than just Fed policy that’s being set.
04:55 Speaker B
Um, and what we’ve heard from Powell and recent, um, in recent public commentary, what have we learned about what the Fed’s going to be looking at to see if indeed the tariff induced price increases are more permanent or transitory?
05:26 Speaker A
I think that inflation expectations, the softer data, um, are going to be key. The short term, they’re not so worried about. It’s the longer term expectations. Right now, you look at the the tips market versus the nominal. Those seem to be in check for right now. We did see longer term inflation expectations pop up in the University of Michigan survey, but we haven’t seen that in other surveys. Of course, they’ll be watching the outright data as well, and as you know, uh, reading recently, uh, for February on their preferred inflation gauge, excluding those volatile food and energy prices, had already jumped up to 2.8%. Um, and that was before we really saw these aggressive tariffs announced. So as these begin to go into effect, if they remain in effect, and as businesses anticipate the potential impact of that, we will see how that works through the actual hard data. Remember, the Fed is very much an animal that likes to look at the hard data, and right now, Powell says they’re trying to sort of make sense between what the hard data is saying and what the soft data is saying.