Trump's moving tariff targets could add another layer of uncertainty to the Fed's rate decisions

Business Insider

4 days ago

The Trump administration's long road to trade deals with key partners raises the possibility that tariffs' ultimate impact on inflation will be pushed out — and that creates more uncertainty for Federal Reserve decision-makers.
Fed Chair Jerome Powell has said repeatedly that he's comfortable waiting to cut rates until he sees clear evidence of what the trade war means for prices. Much to the chagrin of the president, Powell is in no rush to move, and with the latest delay of tariff deadlines to August 1, he might be comfortable waiting even longer.
Chances of a rate cut this month were already slim after last week's jobs report continued to show a strong labor market. Meanwhile, the odds of a September cut are still high, at 63% on Tuesday, but some observers see the Fed holding steady at that meeting as well.
If the Fed cuts rates, bond viligantes could protest, sending yields higher over fears of what looser financial conditions might do to already-rising debt levels, Ed Yardeni, president of Yardeni Research, said.
"That's the risk they have now if they resume easing," Yardeni told Bloomberg on Tuesday morning. "The unemployment rate is 4.1%, inflation is a little above 2%. Why mess with success?"
Powell himself has pointed to Trump's tariffs as the reason why the Fed has held off on easing. While inflation hasn't risen significantly this year, many strategists expect prices to rise over the summer as the impact of "pull-forward" buying fades and companies pass down tariffs to consumers.
According to Kurt Reiman, head of fixed income at UBS, tariffs levels are likely to end the year in the mid-teens. "We would expect between here and year end, still substantial headline risk, and that it's mildly stagflationary for the economy," Reiman said at a UBS conference on Tuesday.
Stagflation risks, which Torsten Sløk, Apollo's chief economist, has been warning about this year, would make rate cuts even more difficult for Powell. While the Fed hasn't explicitly expressed stagflation concerns, it did increase its projections for unemployment and inflation for year-end during its June meeting.
Sløk is predicting only one rate cut this year: "There is no need, especially not with Powell at the same time saying he expects a meaningful rise in inflation over the coming months," he said on Bloomberg last Thursday after the jobs report.
Fluctuating tariff deadlines will make it harder for companies to make hiring and pricing plans, according to Ben Laider, head of equity strategy at Bradesco Securities. That means it could take even longer for the labor market and inflation readings to accurately reflect the impact of tariffs.
"This level of uncertainty, even thought it may have come down a bit, is absolutely corrosive to decision making, to confidence," Laider said on a July 7 episode of the Bloomberg Surveillance podcast.
Markets see a less than 5% chance of a rate cut this month, according to CME FedWatch. The outlook for September and beyond is more optimistic, with a 96% chance of easing by December. However, with increased tariff headlines, it's likely the Fed will remain in "wait-and-see" mode for now.