Powell Heads for the Mountains
As Federal Reserve Chairman Jerome Powell prepares to address the audience at Jackson Hole this Friday, there’s a noticeable lack of consensus among policymakers. The minutes from the Fed’s July meeting, released on Wednesday, don’t suggest a smooth glide toward an economic soft landing, but rather read like a transcript of a heated debate.
Although “almost all” participants are on board with keeping the federal funding rate between 4.25-4.50%, the term “almost” is telling. Two dissenters—Governors Michelle Bowman and Christopher Waller—stand out. Their differing perspectives are clear in the minutes. While many expressed concerns about the risk of inflation, Bowman and Waller suggested that, without the tariffs’ influence, inflation is nearly on target, cautioning that negative risks are increasing in the labor market.
Customs Debate Takes Center Stage
The discussion surrounding tariffs is more than just about decimal points; it symbolizes a significant divide in how the Fed views its role. The majority see tariffs as potentially permanent inflationary shocks, while a minority argues they are merely one-time price adjustments, akin to an oil embargo or a bad harvest.
The Fed’s staff contributed to both sides of the argument. They acknowledged stagnant economic growth and asserted that tariffs are driving up prices. Yet, they also quietly reduced the tariff forecast from what it was in June, suggesting the impact on inflation may be less severe, potentially easing to 2% by 2027.
Why Tariffs Don’t Necessarily Raise Prices
The meeting minutes are detailed and reveal a complex picture. Businesses indicated that tariff costs don’t simply translate to higher prices. Instead, they often opt for renegotiating contracts or seeking alternative suppliers to avoid passing on costs to customers. Some companies are even reorganizing their production processes or keeping profit margins low temporarily. Others seemed to be leaning toward offering better wages or investing in efficiency to manage new expenses.
Over this backdrop lies a bigger picture of weak demand. Household spending is showing signs of fatigue, and many businesses struggle to pass on higher costs, even if they want to. Several discussion participants pointed out that weak consumer demand can act as a brake on inflation. Essentially, if consumers are hesitant to spend, the effect of tariffs becomes less significant.
This simplistic notion that “inflation equals tariffs” fades into something more complex. The ability of companies to pass on costs to consumers appears limited, dependent on multiple factors, rather than being a straightforward equation.
Understanding Waller and Bowman’s Opposition
While specific names aren’t mentioned in the minutes, it’s easy to deduce who they’re referencing. For instance, the line about several participants suggesting that tariffs obscure underlying inflation trends could be linked to Bowman and Waller. They were the two dissenters in a decision to favor a quarter-point rate cut, a rare divergence within the board. Since then, Bowman has publicly argued for viewing tariff-induced inflation as a temporary issue, while Waller expressed concerns that a cautious approach could result in being out of sync with the evolving economic reality.
These viewpoints aren’t radical; they suggest that tariffs might create temporary disruptions in the data rather than fundamentally altering inflation expectations, although the changing labor market poses genuine risks that need attention.
Powell’s Balancing Act at Jackson Hole
This scenario leaves Powell in a delicate position. He needs to present a unified front that acknowledges the majority’s concern over tariff-related inflation while also recognizing the minority’s perspective that the economy is struggling under restrictive policies. He must navigate carefully through the staff’s analysis that reflects a reality where tax-related inflation is still possible, yet smaller and more prolonged than initially feared—not a permanent issue.
Independence and credibility are key aspects of his agenda in Wyoming. The real challenge, however, is whether he can convince both the market and his colleagues that central banks can discern between price-level shocks and inflation trends. This distinction is crucial; it could mean the difference between timely action and falling behind the curve.
