It’s not news that Federal Reserve Chair Jerome Powell doesn’t like tariffs. (See, e.g., these comments from back in 2018.) …Continue reading →
It’s not news that Federal Reserve Chair Jerome Powell doesn’t like tariffs. (See, e.g., these comments from back in 2018.) He made that clear again just last week in his press conference following the latest interest rate decision by the central bank.
What is news is that his latest claim about President Trump’s spate of tariffs and tariff hikes this year boosting inflation just got some strong pushback from Larry Summers – one of the leading macroeconomists of his generation, a Treasury Secretary during the Clinton administration, and no fan of tariffs, either. (See, e.g., here.)
Powell told the Fed’s press corps on Wednesday that “inflation away from tariffs is actually not so far from our 2 percent goal. We estimate, people have different estimates of what that is, but it might be five or six tenths, and so if it’s 2.8, then core PCE, not including tariffs, might be 2.3 or 2.4, in that range, something like that. So that’s not so far from your goal.”
In an interview yesterday morning, though, Summers called that fake-onomics. “You can always take some things out of the numbers and then say we’re near normal,” he told”Bloomberg.com.
He explained, “Yes, maybe it’s true that if you take out tariffs, the numbers will look good. But because people are spending more money on tariffed goods, they’re spending less money on other goods whose price is lower, and that should be taken out as well. So I don’t think cherry-picking the components that have risen is a particularly good way of doing the analysis.”
As made clear by Breitbart.com’s John Carney (see here), Summers was pointing out widely recognized influences on prices and their changes that Powell completely ignored. They’re the fiscal and budgetary policy decisions that strengthen or weaken consumer demand.
And nowadays, as Carney continued, the major revenues being raised by the Trump 2.0 tariffs are greatly reducing the nation’s budget deficits (at least from their pre-tariff path) and therefore reducing the economy’s demand levels – which all else equal will constrain or actually depress prices. He went on to note that the “categories [that] should be most sensitive to domestic demand conditions [are] Services. Non-tradables. Goods with high domestic content. In other words: the low-tariff-exposure categories.”
Weirdly, the Fed chairman alluded to the relationship between demand, tariffs, and inflation in April, shortly after Mr. Trump announced his sky-high “Liberation Day” duties. But in the process, he ignored his fundamental macroeconomics:
“A tariff is like a negative supply shock. That’s a stagflationary shock, which is to say it makes both sides of the Fed’s dual mandate worse at the same time. Prices are going up while jobs are being lost and growth is coming down, and there is not a generic playbook for how the central bank should respond to a stagflationary shock.”
If growth (presumably in the entire economy) is coming down, it’s indeed entirely possible that some prices might still be going up. But with reduced overall demand levels, prices on net must be going down, too. Unless businesses faced with fewer and fewer customers decide that that’s a great time to make their goods and services more expensive? And as Carney stated, most of these price cuts will come in non-tariffed categories.
Moreover, since not only have tariffs been imposed, but budget deficits are shrinking (again, at least from their previous path), then demand must be suffering a double blow – both due to the Trump levies. Which indicates that Powell’s insistence that tariffs are pushing up total inflation rates is something like doubly wrong.
Worse for the Fed Chair, the idea that the Trump tariffs are worsening inflation in tariffed categories just took another hit from another tariff opponent. Right after Liberation Day, billionaire investor Ken Fisher slammed the levies as “stupid, wrong, arrogantly extreme, ignorant trade-wise and addressing a non-problem with misguided tools.”
In a post this past Tuesday, however, Fisher wrote that “While the big fear is tariffs’ spiking prices, they appear to be having minimal effect so far. CPI’s [Consumer Price Index’s] core goods component has risen month over month for four straight months, suggesting some sway. But core goods are up just 1.5% y/y.”
Core goods include most of the consumer (and business) purchases that are tariffed goods (except for items that have been exempted). So what Fisher is saying that their prices are rising more slowly than the Fed’s overall inflation target.
Further, he observed that “tariff-sensitive goods comprise just a small portion of CPI—only about 10%—so any contribution to headline inflation is tiny.”
To be fair, Powell repeated in his press conference his belief that “A reasonable base case is that the effects on inflation will be relatively shortlived—a one-time shift in the price level.” (So does Fisher.) But he added that “it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”
Summers and Carney have shown that this can’t be true from an economic theory standpoint. Fisher has shown that this claim so far clashes with the facts. (So did Carney, at least for the last few months, in a post I discussed here on RealityChek.)
All of which means that it’s increasingly clear that Powell doesn’t like tariffs because…he just doesn’t like tariffs. That’s a heck of a basis for making monetary policy, let alone trade policy.
