What Fed Chair Powell said
From Powell’s Wednesday remarks:
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.” Later in the speech, he said: “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
Powell advocates for a measured approach, suggesting that we observe how the current tariff situation develops. In the next three weeks, there is the potential for agreements with other countries that could alleviate tensions in the trade war. However, tariffs could also evolve into a long-term challenge that may impact the economy and housing.
What Fed Governor Waller said
Earlier this week, Federal Reserve Governor Christopher Waller had this to say:
If the tariff-induced slowdown is significant and threatens a recession, “I would expect to favor” cutting sooner and faster than previously thought. “With a rapidly slowing economy, even if inflation is running well above 2%, I expect the risk of recession would outweigh the risk of escalating inflation, especially if the effects of tariffs in raising inflation are expected to be short-lived.”
Let’s explore the two differing perspectives on the trade war and examine how these approaches vary, along with their implications.
Different takes on tariffs
Waller views tariffs as temporary price adjustments, suggesting that if a recession occurs, we may see a cooling in the growth rate of prices. With the dual mandate in mind, he advocates for a proactive approach.
Conversely, Powell raised important considerations regarding the implications of trade wars, pointing out that supply chains can be significantly disrupted. He noted that the automotive industry has exemplified how such disruptions can lead to prolonged inflationary pressures.
Both perspectives are compelling. Due to the limited availability of products, supply shocks typically exert inflationary pressure, even when demand remains stable or decreases. So, this trade war will worsen the economy if supply shortages happen. In that case, I believe we will see loud calls by President Trump to fire Powell for allowing the recession to get worse, and Trump will advocate for other members to become the new Fed Chairman.
Powell today: “Our role is to make sure tariffs cause only a one-time price increase.”
Powell is taking a position similar to New York Fed President John Williams, which suggests that the current policy is appropriate given the potential future developments in the escalating trade war. Essentially, if we experience a mild form of stagflation — where economic growth slows and unemployment rises, but inflation remains high — monetary policy is in a good place to handle that now, which doesn’t sound very dovish for future rate cuts.
Conclusion
We may be preparing for a heated summer showdown among different factions within the Federal Reserve. President Trump most likely didn’t appreciate the news he received today from the Fed Chair. If recessionary indicators — such as rising jobless claims and residential workers losing their jobs — begin to emerge, the actions of the Federal Reserve will increasingly be in Trump’s crosshairs, especially if mortgage rates don’t go lower as the White House wants to see.