The
Fed Whisperer analyzes the Federal Reserve's decision today.
“Economic data released earlier Wednesday offered mixed signals, explaining the Fed’s caution.
While second-quarter GDP growth topped expectations at 3%, a measure of private business
and consumer demand continued decelerating to 1.2% from 1.9% in the previous quarter
and 2.9% late last year.”“'Jay is navigating so many things right now, but one thing that he says that is both true and underappreciated
by his critics is that the tariffs are showing up in certain parts of the price index,' said Richard Clarida,
a Trump appointee who served as Powell’s second in command for more than three years beginning in 2018.”"Powell and his colleagues are studying how tariffs filter through inflation data in the midst of anxiety
that higher goods prices will keep inflation above the Fed’s 2% goal for a fifth year.
Inflation has declined notably from 2021-23 highs without the recession many economists had predicted,
but officials are cautious about declaring victory and possibly reigniting price pressures
by cutting rates prematurely.”https://www.msn.com/en-us/money/markets/fed-holds-rates-steady-but-two-officials-back-a-cut/ar-AA1JB0uE
Comments
Jerome Powell:
“If we cut rates too soon, maybe we didn't finish the job with inflation.
There's — history is dotted with examples of that.
If you cut too late, then maybe you're doing unnecessary damage to the labor market.
So we're trying to — we're trying to get that timing right.”
Nick Timiraos:
“Well, it tells you that the economy is doing OK.
In the first quarter, recall, we had a negative GDP print, but it was sort of anomalous
because it reflected a bunch of inventory front-running, importing ahead of the tariffs.”
“And so that actually pulled down the headlight number.
It all went the other way in the second quarter.
But as you noted in setting this up, if you look at private spending and investment,
it was softer in the second quarter than it was in the first quarter.
And it was softer in the first quarter than it was at the end of last year.
In fact, that reading was the weakest since 2022.
So the issue here really is that the economy is slowing, but it doesn't look alarming right now.”
“But the point here is that tariffs have created hand-to-hand combat between importers,
suppliers, retailers, and potentially consumers because somebody is going to have to pay.
And the Fed wants to make sure that that if those prices get passed along to consumers,
we don't have another episode of higher inflation.”
https://www.pbs.org/newshour/show/economy-grows-more-than-expected-despite-trade-war-concerns
He was quite busy this Wednesday!
Powell’s Gamble
“Does the wait and see on inflation give cover for companies to raise prices? Powell said in 2018 washer tariffs but no dryer tariffs, but companies raised prices on both. Companies walk the street together, alluding to fact that companies follow each, especially when raising prices.
Why would a Fox reporter question virtue of corporations, did he think he was working for Mother Jones? I remember on the WSJ comments last few years on stories about companies raising prices above input costs and 95% of comments stated that is was impossible for companies to be greedy because then other companies would undercut them. They also made up fantasy alleging that if companies were being greedy during inflationary times, why aren’t they greedy all the time.
I think he was ready with that example too - in Trump 1.0, tariffs on washers, not on dryers, but prices went up for both. It isn't something that just popped out of his head. Most buy them in pairs although washers have shorter lives than dryers.
Some companies are raising prices or reducing package sizes without saying why. Some who attributed price increases to tariffs were criticized in the media.
Another MFO thread is on tariff related writedowns - Volvo/Geely (China), Stellantis/STLA (Europe), etc are examples. I am not aware of aware of any US company doing this so far.
A couple of thoughts come to mind.
Lauding big business - that's so 1980s. Putting a populist sheen (support for the struggling overcharged consumer) on actions that advantage the better heeled, that's au courant.
Alternatively, to question the Fed's hesitance in lowering rates is to side with Trump's challenging of the Fed. Even though if the Fed were to act, it would be to lower rates which would relax downward pressure on inflation.
Regarding the ability of companies to raise prices: Once inflation gets ingrained, people are more forgiving of price hikes because they're expected (positive feedback loop). Buyers become less discriminating and more accepting of price hikes, as they anticipate more to come. There's also a stickiness factor - prices are raised quickly as costs go up but businesses are loath to reduce prices as their costs decline.